"Greed, for lack of a better word, is good". That's the signature line uttered by Michael Douglas' immortal character Gordon Gekko in the 1987 film Wall Street. It has come to define all that is perceived wrong about the world of finance and investing – whether you agree with that concept or not.
Of course, the concept of greed in markets has been around a lot longer than Wall Street (the film) has. One of the founding fathers of value investing, Benjamin Graham, described how the share market is moved by the 2 emotions of fear and greed in his 1949 book The Intelligent Investor.
According to Graham, it's either fearful or greedy behaviour that causes markets to become periodically irrational, which inevitably leads to a restoration of rationality after the emotions have run their course.
So how do these concepts relate to today's share market?
Well, one of my personal investing idols has recently described the current state of the global share market as "the greediest" he's ever seen.
He points to Tesla reaching more than US$2,000 a share, Amazon.com reaching US$3,200 and Apple shares more than doubling since March as evidence.
I suppose we Aussies could point to how Afterpay Ltd (ASX: APT) shares have rocketed more than 800% since March and find the same conclusion.
So, is the market irrationally greedy right now? If it is, it's not a good sign for investors and could indicate a market crash is on the horizon.
Greed isn't good
I do think there are signs of irrational exuberance in the markets right now. Yes, the coronavirus pandemic has gilded the fortunes of a few ASX companies as well as crippled many others. Investors seem to be rewarding the winners with massive floods of new capital. Just look at the share prices of Afterpay, Zip Co Ltd (ASX: Z1P), JB Hi-Fi Ltd (ASX: JBH) and Kogan.com Ltd (ASX: KGN). What is interesting is how most companies that have been decimated by the crisis have also been making investors rich.
Just look at Corporate Travel Management Ltd (ASX: CTD). Its shares are up more than 74% this month and more than 203% since March. That was despite the company reporting an $8.2 million loss last week. Or Sydney Airport Holdings Pty Ltd (ASX: SYD). Sydney airport's business model is almost broken. Almost no international flights are coming or leaving Australia, and probably won't be for at least another 6 months, if not longer. The company won't be paying any dividends in 2020. Yet Sydney Airport shares are only 7.5% lower than levels seen in 2017, up more than 27% since March and currently have a price-to-earnings (P/E) ratio of more than 80.
Foolish takeaway
I don't think this 'buy the winners, ignore the losers' attitude that investors seem to be adopting can continue forever. Who knows how or when it will end, but end it will. The markets have seen plenty of greed before, and it's never been sustained. And the only other options are rationality or fear. Something to keep in mind as we make our way towards the end of the year!
