Banking

‘Trillion-dollar man’ Dan Peña breaks down the 4 risks he says will soon result in a massive stock-market crash — and shares how investors can protect themselves

  • Dan Peña says a combination of factors including margin debt is leading to a massive correction. 
  • He also notes that bitcoin does affect the market because it’s highly leveraged. 
  • He recommends sticking to value-based investing or dollar cost averaging into a few funds.
  • See more stories on Insider’s business page.

The crash of all crashes is on its way, according to the prominent businessman Dan Peña, who’s been betting on a strong stock-market correction for the past few months.

Peña, a Wall Street veteran, oil tycoon, and longtime investor, said he believes that the combination of four risks is creating the perfect storm for a massive plunge: margin debt being at an all-time high, interest rates at an all-time low, an overvalued market, and the lack of sophistication on the part of the average investor.

He isn’t alone, especially now that stocks are near record highs. Michael Burry, the famed investor who became known for predicting and profiting from the 2008 financial crash, felt moved enough to revive his Twitter account for eight days last month after deleting it in early April. Burry tossed out a few tweets warning retail traders not to get drawn into the hype before “the mother of all crashes.”

Peña, in an interview with Insider, also took a jab at retail investors, specifically millennials. He said that they either don’t have a good historical understanding of market patterns or are choosing to ignore the past and look at the current

bull market
as a new normal.

As for the AMC meme-stock movement, he called it a game of musical chairs: Every time the music stops, more players will be left out. 

Unbeknown to Peña, he’s become a bit of a TikTok celebrity, as snippets from his seminars and speaking engagements have been making the rounds across the platform, raking up millions of views. The self-nicknamed “trillion-dollar man” claims in his bio that his methodology for building companies, which he teaches as online courses, has produced that much in equity or value. 

His edge and lack of political correctness seem to resonate with younger audiences seeking a bit of self-imposed tough love. Peña, 75, credits his wisdom to the multiple recessions he’s lived through and his international business acumen.

“As I’ve been told by techies, and I’m not a techie, is there’s still no algorithm for 50 years of experience. And I’ve been around the block. I’ve been in business on all six to seven continents,” Peña said.

Stock-market concerns 

Peña’s main concern is margin debt, or money borrowed for trading, which he notes is at an all-time high. Data from the Financial Industry Regulatory Authority shows margin debt rose 56% year over year to a record $861.6 billion in May. 

Peña referred to a pattern in two of the past three crashes — the dot-com bubble and 2008 financial crisis — when margin debt spiked to record highs before the markets tumbled. This time, the debt level is almost double its previous highs, Peña noted. 

He also drew attention to depressed interest rates. He noted, as Bank of America did, that they’re near 5,000-year lows, which is leading more people to take on debt. 

The result, he said, will be that those who made decisions based on poor risk assessment will get wiped out, and it will most likely be the younger individual investors who lack historical context.

“When we do have a correction, a lot of people will have to sell assets to cover their margin,” Peña said. “And even though I’m not a believer in bitcoin, bitcoin does affect the market, and what most kids don’t realize, or they’ve chosen not to realize or not to notice, is that you can leverage up to 95% on bitcoin.”

Ratios of up to 100 times leverage are not uncommon on trading platforms where cryptocurrency derivatives transact. Even as platforms get regulated, offshore exchanges continue to face much less red tape. 

Burry also drew attention to the issue, tweeting that the problem with crypto is leverage, and those who don’t know how much leverage is in crypto don’t understand it. 

Peña said the deleveraging process will result in retail and institutional investors selling assets off to cover their margin, which will only accelerate a broader, snowballing market sell-off.

The solutions

Peña recommended focusing on value investing as developed by Benjamin Graham and David Dodd, who are widely known for the approach that digs into a company’s books, seeking out high earnings, solid dividend yields, and low debt.

He added that more recently, he’s noted that picking companies that provide essential goods and services is also an important factor, especially after observing many strong brands take a hit during the COVID-19 pandemic.

For younger investors who might not have six or seven figures to throw around in speculation but who can leverage the power of time and

compound interest
, he recommended dollar-cost averaging into no-load mutual funds, which are sold without commission or sales charges.

The same approach can also be done for diversified ETFs, specifically ones that track index funds. The key is to seek out funds that have been able to outperform the market or do well over the past 15 to 20 years. Once investors have identified the top performers, Peña recommended spreading monthly contributions out across three or four of those funds.

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