Wall Street investor Bill Ackman has likened the stock market to a casino, warning against speculative trading.
Ackman, the CEO of Pershing Square Capital, appeared on CNBC on November 3, criticizing excessive leverage and speculative trading for increasing market volatility.
He pointed out that some stocks are trading at inexplicable prices, suggesting that the market has reverted to a casino-like environment. He specifically mentioned daily leveraged products and perpetual futures as risk factors.
The primary risk of leveraged products is that even if the underlying index recovers, the investment may not return to its original level. For example, if an index drops from 100 to 90, a subsequent rise of about 11.11% would bring it back to 100. However, if an investor put $1,000 into a leveraged product that tracks double the daily returns, the outcome would differ.
If the investment initially drops 20% to $800, a subsequent rise of about 22.22% would only bring it to approximately $978. The index may have returned to its original level, but the investor would incur a loss of about $22. This is a simplified calculation excluding fees.
This occurs because leveraged products track daily returns as multiples rather than cumulative returns over a period. The compounding effect during price fluctuations can lead to actual returns differing from expectations.
The U.S. Securities and Exchange Commission (SEC) has also warned about the risks of leveraged products. In a case published in 2023, a leveraged ETF that tracked double the daily returns fell by 6% while its underlying index rose by 2% from December 2008 to April 2009.
During the same period, another leveraged ETF that tracked triple the returns plummeted by 53% despite its underlying index rising by about 8%. This indicates that an increase in the underlying index does not guarantee profits for leveraged investors.
Leveraged products are not always disadvantageous. If a bullish trend continues, the compounding effect can lead to cumulative returns exceeding simple multiples of the underlying index's rise. Conversely, in a volatile market, losses can be amplified.
Ackman noted that such market volatility could present opportunities for long-term investors. He explained that Pershing Square seized buying opportunities when the stock prices of strong companies like Microsoft and Amazon dropped significantly.
* This article has been translated by AI.
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