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Interview

Legendary trader Larry Hite sees tech bubble, says Tesla yet to prove value

By Nov 23, 2020 (Gmt+09:00)

NEW YORK -- Larry Hite, long-time successful hedge-fund manager who doesn’t believe anyone can predict how the stock market will move, has warned of a bubble in tech stocks, citing Tesla Inc. as one such example.

The legendary trader also said property purchases are a good investment at a time when interest rates are at ultra-low levels, but the appetite for office buildings will wane in the wake of the COVID-19 pandemic.

Larry Hite
Larry Hite
“Yes, there is a bubble and using Tesla as an example, we will have to wait and see if it will be able to prove itself,” Hite said in a recent exclusive interview with The Korea Economic Daily.

“I look at Tesla as an option, not as a stock. He (CEO Elon Musk) is a genius and into solving large problems, but we don’t know what’s going to happen and emotions are running high.”

The 64-year-old fund manager was responding to the question of whether there is a bubble in the (US) stock market, especially with big tech stocks, given that Tesla's share price has risen more than fivefold this year.

He said he favors investing in real estate, which produce a stable rental stream, as investors can refinance at lower rates or get cheaper loans for new properties. He added that office buildings will be “repurposed” as housing, as the pandemic showed people don’t need as much office space as before, amid the rampant stay-at-home remote work environment.

Hite recommended utilities, health care, pharmaceuticals and commodities as sectors that can benefit from global low interest rates.

On the global economic outlook, he said the investment environment will become more stable with President-elect Joe Biden in office, with expectations that he will take a more collaborative approach to global trade relations.

Lawrence D. Hite is one of the forefathers of system trading and the author of The Rule: How I Beat the Odds in the Markets and in Life – and How You Can Too,named a Wall Street Journal and LA Times bestseller.

He co-founded Mint Investment in 1981, which became the world’s largest commodity trading advisor in terms of assets under management in 1990. He also pioneered the principle protected fund concept. In 2001, he launched Hite Capital Management.

Currently, he is a principal investor and chairman of North America region of Metropolitan Venture Partners, a venture capital firm specializing in tech-based firms. He has also founded his own charitable enterprise, The Hite Foundation, where he serves as chairman.

The following is an edited transcript of the interview:

▶ What is your outlook on the US and global economy in the coming years? (Especially next year)

“When you start believing you have remarkable predicting powers, you get into trouble every time. I let the markets tell you what to do and let the numbers do the talking. I am a trend follower, which empowers you to see clearly so that you make the right choice for right now. It gives any motivated person a chance to invest in the markets with managed risk.”

▶ When do you think the real economy will start to improve? What measures need to be taken to fulfill that goal?

“Pharmaceutical companies Pfizer Inc. and BioNtech SE have shown promising results for a COVID-19 vaccine, which boosted stocks and will really advance the economy in the long term. For now there is much more work to be done with the logistics of production and distribution of the vaccine, with COVID cases continuing to rise and having greatly impacted the restaurant and travel industries. I believe recovery will be a slow process but once the vaccine is widely available the markets should rally and the economy will recover.”

▶ There’s a lot of controversy surrounding stock prices. Do you think there is a bubble in the stock market, especially with the big tech stocks? (The share price of Tesla has skyrocketed more fivefold this year alone.)

“Yes, there is a bubble and using Tesla as an example we will have to wait and see if it will be able to prove itself. I look at Tesla as an option and not as a stock. He (CEO Elon Musk) is a genius and into solving large problems, but we don’t know what’s going to happen and emotions are running high. When everyone is panicking, as in March, buy; when everyone is irrationally exuberant, sell. And rarely has anything been as exuberant as Tesla stock. I have done extensive research and run thousands of tests over hundreds of years and what I see convinces me that people’s emotions don’t change. It’s not intellect that moves the markets, it’s emotions.”

▶ How do you think the economy and investment environment will change after the election?

“I think it will become more stable with Biden in office. Trump is a very polarizing and divisive person and although he had some accomplishments, these were overshadowed by his volatile personality. I would hope that our international relationships will improve and there will be a more collaborative approach to global trade relations.”

▶ The Fed recently indicated it will keep interest rates at the current zero level until 2023. Under these circumstances, which investments look promising in the future?

“Income-producing real estate with a stable rental stream would be a good investment enabling one to refinance with lower rates or getting cheaper loans for new properties. In the future we may see office buildings being repurposed as housing. One lesson we’ve learning from COVID-19 is we don’t need as much office space as people can work from anywhere. Also, there are certain stocks that benefit from low interest rates, such as utilities, health care, pharmaceuticals and commodities.

Low-yield bonds wouldn’t be a good investment because bonds and interest rates have an inverse relationship. As interest rates increase, bond prices generally fall; as interest rates fall, bond prices go up.”

▶ What are your views on the future of US-China relations? How do you foresee the Chinese stock market?

“I would hope we have a more cordial relationship. I look at China as a big manufacturer and the US as a big buyer. They will both profit by working together although each country is controlled by internal politics.”

▶ What’s your view on the Korean market?

“I am not an expert about the Korean market. I think Asia has powerful potential to be successful as they are hardworking, intelligent people.”

▶ What advice can you give to the younger generation in the current environment?

“Set clear goals and dreams for yourself and then pursue them. If you love what you do, it isn’t work. You need to do your research and determine if you trust the people who run the company and they are offering a product that you understand and will buy. The most important part of trading is sizing your bet and controlling your risk – cut your losses quickly and let your winners run. The whole game is to not let your fear or greed influence what the market is saying to you.

"You also need to prepare for your success. As a young man I turned $500,000 into $12 million and I wasn’t prepared emotionally. You need to have a complete plan; not only if you have losses but also for your successes. You have to get comfortable with success and the expectation that arises within yourself and from others.”

▶ Which investment method do you recommend, between direct buying of stocks and mutual funds? And why?

“In the art business they have a saying that art dealers make a living out of what they sells but get rich by what they keep. I’m in favor of finding companies that make money that I want to hold onto for long periods of time. When you invest in mutual funds, you have to understand their methods and determine if it makes sense to you. As a college freshman, Michael Dell started with $1,000 and became a billionaire. He bought old computers from local retailers, then upgraded and sold them from his dorm room. Kids paid for them with their credit cards and there were literally no receivables.”

▶ How can individual investors pick good and promising stocks? Are there any methods for them to protect themselves (under any circumstances)?

“My book The Rule is based on legendary economist David Ricardo’s mantra, “Cut your losses, and let your profits run on.” It’s the first thing I learned as a trader to stay alive and the next thing, if you want to be rich, is to add to your winners. There is no single trading or investment approach that works every time. This is why it is best to mix and diversify. Trend following is about odds, and Wall Street is about telling stories and making predictions. So many advisors still push buy and hold asset investing to the exclusion of all other approaches, but it is now possible to diversify because there are mutual funds and exchange-traded funds that allow ordinary people to gain exposure to trend-following approaches that complement their traditional portfolios.

"I always have a stop-loss order in place which will automate a sell-off once an asset declines by an amount that you have predetermined based on what you have decided you can lose.”

▶ How can individual investors utilize trend following trading efficiently?

“You need to learn the methods of trend following; moving averages, breakouts and it helps to understand why the company is profitable. I studied all the stocks Warren Buffet bought since Berkshire Hathaway. I started a study group and we got to know his methods very well. You have to put in the work with extensive research.

"To spot a rising trend, you look at where the price is now relative to where it has been. So, for example, if the price of a commodity or stock is higher than it has been for 40 or 50 days, more people believe it is higher, so you can buy and ride this trend. When to get out? I simply ask myself how much I can afford to lose. If the answer is 2%, I get out and preserve my capital and look forward to the next opportunity. You have to determine how much you are going to risk as a percentage of your portfolio. That way, even if you are not a rich man, you get the rich man’s advantage. Cutting your losses quickly and staying with your winners is how you make money and it’s also a good way to live your life.”

Write to Jae-Kil Cho at road@hankyung.com

In-Soo Nam edited this article.

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