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- As protests dominate headlines amid the coronavirus pandemic, the stock market has hummed along — finishing May up nearly 5%.
- Aristides Capital, a $135 million fund founded by Chris Brown, told investors in a letter sent Wednesday that "the cognitive dissonance is overwhelming at times."
- Brown called growth stocks without earnings "one step above a Ponzi scheme" and said he foresees a repeat of the 2000 tech-bubble crash.
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Chris Brown — like many professional investors — doesn't get it.
Amid a double-digit unemployment rate, a pandemic, and widespread protests against police brutality, the stock market has continued to tick up. After a disastrous March as global economies shut down, the S&P 500 is close to breaking even for the year.
Brown, the founder of the $135 million hedge fund Aristides Capital, told investors in a letter Wednesday that "this is what happens when a government decides to pursue high asset prices as a policy priority."
"On the streets, there are chants of 'Stop killing black people!' and 'No justice, no peace!' Meanwhile, behind a computer, one of the millions of new day traders buys a stock because the chart is quickly moving higher," wrote Brown, whose funds made a little more than 1% in May but are down more than 4% for the year.
"The cognitive dissonance is overwhelming at times," as the disconnect between the average person and the market is "stunning of late," he wrote.
"The social fabric that holds us together has taken a beating. The last four decades have brought increasing financialization and leverage along with increasing profits to those with easy access to capital and stagnant real incomes for everyone else. Our shared cultural institutions are now less shared," he added.
Going forward, he expects to see a crash similar to 2000's tech bubble. Growth stocks that are still unprofitable are "one step above a Ponzi scheme," since someone "needs to be willing to buy shares and give the company capital at an even higher price" than you, he said.
"The investors doing incredibly well are the ones who are buying story growth stocks with no consideration whatsoever about valuation. It's a trend that can intensify even further from here, but one day it will reverse without warning and never look back," he wrote. Valuation experts already expect to see fewer investors willing to put up with unicorns that have no plans to profit in the near term.
Despite Brown's frustrations — he calls it one of "the most difficult market environments" he's ever seen — he's optimistic about being able to buy cheap value stocks. Brown launched his fund in July 2008, just as the Great Recession kicked off.
"If you can muddle through periods when the market is largely inhospitable to your investment style, it's likely that you'll prosper when headwinds abate," he said.
Read more:
- Hedge funds are in uncharted waters right now. Here's how 12 billionaires like Ray Dalio, Ken Griffin, and Seth Klarman survived the last time the world fell apart.
- Investors' usual way of valuing companies is under scrutiny— and it could mean the end of the unprofitable unicorns that dominated in the last decade
- Stocks have met none of the 8 conditions that confirmed every new bull market in the post-war era — and one investment chief warns a relapse into a bear market is coming
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