As we begin 2021, the investing public is tied up in a “frenzy,” to quote Charlie Munger from a recent interview. This “frenzy” can be captured a couple ways. Whether by the investment banking activities that usually coincide with poor market returns going forward (stock market failure), or by the sell-side research analysts playing hopscotch to raise their price targets over their competition in the most exciting stocks. Rather than look at Wall Street, who can often exact nefarious schemes and ideas on investors, we think it would be best to look at market participants to understand where we sit.
Call buying relative to put buying is at a 20-year high as noted by the chart below. Investors have never been this enthused to speculate in options at any point since 2000. This is Munger’s “frenzy.” They aren’t avoiding caution. As the song says, they’re “throwing caution.” They believe “the winds of change are blowing wild and free.” Individual and institutional investors are telling us stories of what the future will hold and what the market has capitalized. As Marty Whitman would remind us, they’re way too interested in the “going concern” and not interested enough in the balance sheet of these situations. Predicting earnings in the future is tough. Looking at the capital structure of a business is more predictable.
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