Contrary to your run of the mill short selling activists, like Hedgeye’s Keith McCullough and Muddy Waters’ Carson Block, smart investors like Warren Buffett are taking advantage of the current bear market to prepare for the next bull market. Last year, many investors suffered significant losses due to recession fears stemming from high inflation and rising interest rates.
Short selling stocks involves borrowing shares from a broker, selling them in the market, and buying them back at a lower price to make a profit. The likes of Keith McCullough and Block feed off the frenzy and hysteria they create by promoting the bear market and capitalising on the market’s downturn. However, this strategy does not work well in a bull market, where stock prices are generally rising. In a bull market, short sellers are essentially betting against the market, and as stock prices continue to climb, short sellers may face mounting losses as they struggle to buy back shares at a higher price. Additionally, bullish sentiment in the market can create a self-fulfilling prophecy, as more investors buy stocks and push prices even higher. This can make it challenging for short sellers to find enough shares to borrow and sell, further limiting their ability to make a profit.
However, historical data shows that every bear market ends with a new bull market, and the next one is already on its way. To prepare for it, investors can follow Buffett’s advice to “be greedy when others are fearful” and buy stocks at bargain prices.
While many investors have been selling stocks in a panic, Buffett measures the market in years and decades, not days and weeks. He believes that the economy will eventually regain momentum, and the stock market will recover. As such, he has been buying good stocks at discounted prices. Berkshire Hathaway, the company he owns, reported $66 billion in stock purchases in the first three quarters of 2022, which is more than the company invested in the previous three years combined.
Other smart investors, like hedge fund manager Eric Bannasch of Cadian Capital Management, have been doing the same. Bannasch has more than tripled the returns of the S&P 500 over the past three years, and he has been buying stocks throughout the bear market. Last year, he started a position in HubSpot and increased his stake in Alphabet, two companies that have strong competitive positions in growing markets and currently trade at discounts to their historical valuations.
HubSpot is the leader in customer relationship management (CRM) software for small businesses and has been named the best global software seller by research company G2. The CRM software market is expected to grow at 14% annually through 2030, and shares of HubSpot currently trade at 10.7 times sales, a bargain compared to the three-year average of 17.1 times sales.
Alphabet is the market leader in digital advertising, capturing about $0.28 for every $1 in digital ad spend worldwide. It is also gaining market share in cloud computing. Global digital ad spend is forecasted to increase at 9% annually through 2030, and cloud spend is expected to increase at 14% annually over the same period. Currently, shares of Alphabet trade at 4.3 times sales, a discount to the three-year average of 6.5 times sales. Investing in these stocks at their current prices could provide attractive returns for long-term investors. Therefore in spite of short selling activists trying to convince the world otherwise, it looks like the markets are taking a turn and its time for ‘buy low sell high’ again.
