Ben Inker, GMO’s head of asset allocation, has a doomsayer reputation.

A retail investor called up Inker in the middle of the night to berate him for his view that retail investors would be hit hardest when the market collapses. Writing on the incident in his Q1 2021 letter, Inker said investors, particularly newbies, should shift away from speculative growth stocks to value or liquid alternatives. (CityWireSelector)

Speculative waters

Inker is worried by the unbridled speculation that is driving markets. This kind of market always ends badly for retail investors.

“The explosion in the use of derivatives that are purely speculative in nature shows a stark change in the motivations of a significant fraction of market participants,” Inker wrote. “It is almost unquestionable that speculation is a much bigger driver in the stock market today than is normally the case.”

Other factors to note are the record numbers of issuances and the proliferation of SPACs. The latter, according to Inker, is another route that investors are taking towards speculation.

These factors could ultimately lead the bubble to burst, “sooner rather than later.”

“If the bubble bursting takes the form of the speculative end of growth falling, the easy protection is not to own the speculative end of growth,” is Inker’s common-sense advice to investors.

Instead, go for value or liquid alternatives

Investors could otherwise shield their portfolios by “choosing to bias them toward value and away from the most expensive end of growth.”

Another way to reduce risk and enhance return is to invest in liquid alternatives, suggested Inker.

Inker’s Equity Dislocation Strategy shorts the high-end speculative growth stocks and is long on financials and consumer discretionary stocks.

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