The Good and Bad of Teens Pouring Into Stocks

'Teen' doesn't mean 'fool'... But teens are missing something... Reality as good as fiction... Buffett: I don't learn from my mistakes... The unsexy path to investing success... Hang around the creek... How far stocks could fall...

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'These Teenagers Know More About Investing Than You Do'...

So says a recent Wall Street Journal headline that linked to another story titled, "Teenagers Are Pouring Into the Stock Market."

The Journal reports this:

A Fidelity study on teens and money recently estimated that about a quarter of teenagers in the U.S. have started investing, based on an online survey of 2,081 respondents ages 13 to 17. Trades placed using Fidelity's Youth app, an account opened by parents but owned by teens, jumped in the fourth quarter.

And this:

Custodial accounts for teens at [Charles] Schwab totaled nearly 200,000 in 2022, up from about 120,000 in 2019, according to the company. They jumped above 300,000 in 2023, thanks in part to Schwab's integration of TD Ameritrade. Other brokerages, including Vanguard, Fidelity and Morgan Stanley's E*Trade, also reported a surge in custodial accounts in recent years.

It's great to see these young folks getting an early start, and I admire them for doing so. And at least one teen interviewed for the story seems downright wise for his age...

Felix Peng, a 17-year-old in the Los Angeles area, said he has learned a lot about investing from YouTube and Instagram – but that some social-media stars promote riskier trading strategies that seem more like gambling. He said it is a red flag when influencers try to sell expensive trading courses that promise investors they will make a lot of money quickly.

Bully for Felix! Somebody ought to send him a copy of The Intelligent Investor by Ben Graham (Warren Buffett's favorite investing book). I wish every teen would learn to save and invest for their future.

Still... while it's a good thing to see teens getting a leg up on their futures, I doubt it's a coincidence that they're flooding into the market as we soar deeper into mega-bubble territory. The Journal reports that they all like stocks like Apple, Amazon, and Tesla, along with index funds.

Smart young folks jumping into the market during a mega bubble reminds me that several different Stansberry Investor Hour podcast guests started their investment careers during the late-1990s dot-com boom.

Those guests will usually say something like, "I made money in the boom and lost it all and then some in the crash... but I was hooked." The fact that they're appearing on the Investor Hour means they studied, learned, and became successful investors over time.

So two things can be true at the same time: that young folks investing and saving is good... and that young folks pouring into the most popular stocks in the market at inflated valuations is a typical sign of a mega bubble.

The market makes fools of us all sooner or later, including the best, brightest, and most experienced. It should surprise no one if the market does the same with these bright teenagers.

I must go one step further...

If you were writing a fictional tale in which a savvy investor navigates the top of the biggest financial mega bubble in all recorded history, your protagonist could read the Journal's headline with a smirk.

While long on brains and learning power, teens are generally a little short on something else...

The oldest teenagers alive at this moment were born in 2004. They were preschoolers during the great financial crisis. They were 15 during the pandemic-lockdown crash of March 2020.

Maybe they were old enough to understand some of the economic and financial implications of the pandemic-lockdown era and what has happened since. Maybe the boom that followed the March 2020 crash got them hooked, same as the dot-com bubble did for so many Stansberry Investor Hour guests.

Few teens have a key ingredient that's hard to get before your 30th birthday. I bet most folks are hard-pressed to accumulate plenty of it before they turn 40...

I'm talking about relevant experience researching, selecting, and managing an investment portfolio. Most of these young folks have come in since 2020. To them, 2022 was just another dip to buy.

Experience is very often hard-won and almost always involves weathering substantial losses and long periods of poor returns. What's more, the experience needs to be assimilated, understood, and learned from. It takes time. Nobody is born a great investor, and nobody becomes one overnight.

It's really great that they're starting early, because many of them will need plenty of time to recover from a bear market... and then perhaps learn to deal with the brutal sideways market I expect to follow.

But wait! There's even more hope for our inexperienced teens than I've let on...

The late, great Charlie Munger told us the most painless way to learn from experience...

Munger got a chuckle a few years ago at the 2021 Berkshire Hathaway annual meeting in Omaha, when he said:

I would argue that what you've done [referring to Buffett] and what I've done to a lesser extent is to learn a lot from other people's mistakes. That is really a much more pleasant way to learn hard lessons. And we have really worked at that over the years, partly because we find it so interesting – the great variety of human mistakes and their causes.

You, I, and all those teens in the Journal definitely ought to follow Munger's prescription. Read all you can about others' mistakes, including the big mega-bubble episodes of the past. It's a great education.

Once in Golconda by John Brooks is a great accounting of the 1929 boom and bust. Bull! by Maggie Mahar is a great history of the bull market that ran from 1982 to 2000. And Edward Chancellor's Devil Take the Hindmost is the very best book on the history of speculative episodes ever produced.

Responding to the same question about mistakes, Buffett surprised me when he said:

I don't worry much about mistakes, the idea of learning from mistakes. The next mistake is something different. So I do not sit around and think about my mistakes and think about things I'm going to do differently in the future, or anything of the sort.

The key to understanding Buffett's point is when he says, "The next mistake is something different." He means that there's no point in trying to list mistakes with the idea of not making them again, because your next mistake will be entirely different from the previous one.

If that's all he said about mistakes, folks (especially teens) could easily misinterpret it as, "Make all the mistakes you want. You don't even have to spend any time trying not to repeat them."

That's not Buffett's point at all.

Instead, he focuses (like Munger did) on avoiding exposure to mistakes that would limit his ability to "play tomorrow."

In other words, as long as Buffett doesn't make such a big mistake that he can't continue investing and growing his capital over the long term, he'll do well.

Buffett has made mistakes... Some of his investments have lost money – sometimes a lot of money. But he has avoided the really big, catastrophic mistakes that ruin you so badly you don't have anything left... And he doesn't let whatever mistakes he does make worry him much.

And he has kept this going over a phenomenal 50-plus-year run. Buffett and Munger used an investment framework to keep them in the game, no matter how bad the market performs.

And time in the game is the key to building wealth through compounding.

That, too, feels like something a teenager might not be able to appreciate. If you haven't even been alive two decades, the "long term" is probably a fuzzy concept. So they're inherently less likely to recognize, understand, and prepare for big, distant risks that Buffett or Munger would know well.

Most folks, including teens, tend to focus on the concrete "here and now" of not wanting to miss out on the next big thing. Big risks that require folks to see around corners are too abstract.

When the market is soaring, most folks aren't thinking about how far it could fall...

Folks tend not to worry about what to do in a big, nasty market decline until too long after it has already begun.

It's hard to imagine big setbacks when you're young. You feel like you'll never get old, never suffer a big loss. Munger's advice is very good, but there is simply no substitute for living through a difficult time and coming out the other side without being completely ruined by it. That's true emotionally and financially.

We can't control what happens to us. But we can and must, to the greatest degree possible, learn to respond effectively to whatever the world throws at us.

I've focused many of my Friday Digests on big risks that can blindside you. That's in part because most people don't see them, and even fewer write about them... In a sea of pure noise about the financial markets' short-term moves, don't forget about this timeless truth.

Every Stansberry editor has learned to understand and manage catastrophic loss...

We do it mainly by recommending the use of stop losses on most of our stock recommendations... Some Stansberry editors also encourage readers to use suitably small position sizes. Still others tend to focus on higher-quality and generally less risky securities which are less likely, on average, to cause large permanent losses.

During those Stansberry Investor Hour interviews I mentioned, it has continued to amaze me how often we wind up discussing the same topics with all different kinds of traders and investors.

Whether they focus on short-term trades... long-term investments... cryptocurrencies... or any other approach, they all had similar advice: Picking an investment is less important than properly managing your risk.

Yes, I've told you this before, but I promise you – it is among a very few eternal truths worth repeating endlessly.

It's worth repeating because it's not natural to limit your risk in a systematic way. It's normal for humans to be way too confident, bet way too big, refuse to acknowledge that a trade is going poorly, ride it to the bottom, and sell out in utter despair, resulting in a catastrophically massive loss.

Trailing stops... position sizing... and buying shares of steady, proven companies isn't sexy... But as I've said before, it has teeth. It'll keep you in the game, exactly like it has for Warren Buffett since he took over Berkshire Hathaway in 1965.

To build big wealth in stocks, investors must systematically avoid big losses.

Years ago, a friend of mine managed to surround himself with attractive women...

In the late 1990s and early 2000s, he and I were bachelors in Baltimore. Once, I asked him about all his female friends. He replied with a gleam in his eye, conjuring up a little more than usual of his Texas twang: "Like my mama used to say, 'If you boys keep hangin' 'round that creek long enough, I guarantee you gon' fall in!'"

Once again, it's about staying in the game... If you don't succumb to catastrophic losses and keep "hanging around" the market for a few decades and let the magic of compounding work for you, you're much more likely to "fall in" to a fortune in stocks.

When I see teens pouring into the market in record numbers, it's a strong hint that – like in the dot-com era – folks lack strategies for avoiding catastrophic risk.

I wonder how many who have come into the market during the mega bubble will still be there five, 10, 20, or more years from now...

A big, ugly bear market often scares lots of folks away for a decade or more. And they'll never "fall in" if they don't keep hanging around the creek.

The good news is that those young (and not-so-young) folks who started investing in stocks since the pandemic will get a bona fide degree from the university of hard knocks. There's no substitute for those lessons.

And young folks have the advantage of having enough time to recover even if they do get hit with a big loss. They can keep working and saving, accumulate more capital, and get back in the game.

I'm guessing most Digest readers aren't in that privileged position. Like Buffett and Munger preached, you absolutely must avoid big losses. (At 62, I'm in the same boat.)

Across Stansberry Research, many of our editors have been here for a decade or more... and Dave Lashmet and I joined the company soon after it was founded in 1999. These folks know all about loss avoidance... And as our younger colleagues age and grow in experience, their appreciation for avoiding catastrophe will rise as well.

With stocks at mega-bubble valuations and the most naive investors entering the market in droves, it's probably a good moment to be concerned about how to prepare for the day when mega-bubble valuations begin to fall back to Earth.

How far below us is 'back to Earth'...?

For an answer, let's look at the last time inflation was a big problem in the U.S...

At the start of 1971, the S&P 500 Index's cyclically adjusted price-to-earnings ("CAPE") ratio was at 16.5 times earnings. It largely fell throughout the inflationary 1970s and didn't bottom until July and August of 1982, when it spent both months at the ultra-depressed level of 6.6.

During this period, average monthly CAPE was 8 – less than half of 1971's starting level. Stocks were worth a lot less because inflation makes business miserably difficult to manage.

Investors required greater and greater returns to take the risk of investing during an era of high-single-digit and double-digit levels of inflation. And this translated into lower valuations.

Today, the CAPE is around 34.5...

The S&P 500 would have to fall 77% from current levels to get to a CAPE of 8 times earnings. And the estimates have fallen over the past year, not risen. So if inflation keeps surprising us, there's a credible path to an even bigger decline in the S&P 500.

Most folks will dismiss this as too unlikely to worry about... the same way that, if it did slump to 8 times earnings, they'd very likely dismiss the idea that the S&P 500 could quickly double or triple again. It's just too hard to think about what's not happening right now.

And that's probably the biggest thing that'll get a lot of folks, young and old, in the next several years.

Don't make the same mistake. Whatever investment strategy you pursue, keep hanging around the creek for the long term... and don't let catastrophic failures force you to go home.

New 52-week highs (as of 4/11/24): Alamos Gold (AGI), Applied Materials (AMAT), Amazon (AMZN), Ascot Resources (AOTVF), Alpha Architect 1-3 Month Box Fund (BOXX), Chord Energy (CHRD), iMGP DBi Managed Futures Strategy Fund (DBMF), Enerplus (ERF), Cambria Emerging Shareholder Yield Fund (EYLD), Diamondback Energy (FANG), SPDR Gold Shares (GLD), Alphabet (GOOGL), Kinross Gold (KGC), Occidental Petroleum (OXY), Sprott Physical Gold Trust (PHYS), Sprott Physical Silver Trust (PSLV), RadNet (RDNT), Sprott (SII), iShares Silver Trust (SLV), ProShares Ultra Gold (UGL), Viper Energy (VNOM), and Wheaton Precious Metals (WPM).

In today's mailbag, feedback on yesterday's Digest, where we introduced a new crypto-only Stansberry Research Hall of Fame for Crypto Capital editor Eric Wade's biggest winners... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Congrats to Eric Wade for breaking the [Stansberry Research] Hall of Fame! Well deserved. Won't lie, he's helped me make millions." – Subscriber Mike B.

Good investing,

Dan Ferris
Eagle Point, Oregon
April 12, 2024