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Mark Cuban: 'Everyone is a genius in a bull market'

Key Points
  • Mark Cuban says Fed intervention, not economic fundamentals, has pumped up the stock market.
  • The billionaire investor and entrepreneur is worried that too many novice investors are chasing performance and getting sucked into a day-trading game they will eventually lose.
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Mark Cuban has strong views about what is driving the recent bull market gains, and it is not strong economic fundamentals. Despite the U.S. economy contradicting in the second quarter, the stock market is testing record levels, and that has Cuban worried about the eventual fate of many investors who are new to stock investing.

"I think people are chasing performance. I mean, it is a momentum-based market. I do not think this is a fundamentals- driven market," the billionaire owner of the Dallas Mavericks said in an interview with CNBC's "Squawk Box" on Monday morning.   

Momentum trading occurs when traders continue to buy securities that are rising and sell them when they looked to have peaked. A momentum-based market can be the result of a few stocks artificially inflating the overall market due to their outsized gains. 

Tesla is often cited as a prime example, though some notable long-term value investors are big believers in the long-term outlook for the electric vehicle maker headed by CEO Elon Musk. Tesla has seen its stock value quadruple since mid-March and the company is now worth more than many major automakers, such as Toyota, despite Toyota selling 30 times more cars last year than Tesla. Musk's company has soared to a market cap more than four times that of Ford and GM combined.

"This is not a fundamentals-driven market and it hasn't been since the Fed intervened," Cuban said, referring to the Federal Reserve's extraordinary steps to buy corporate debt and Treasury bonds as part of its effort to keep the financial system running smoothly amid the pandemic. 

Cuban, who was a tech investor during the tech bubble of the late 1990s, said current market valuations are "so similar."

Traders typically end up losing all their money and so you want to be an investor longer-term and understand what you are doing.

He compared "free-traders" or retail traders using zero-commission trading platforms — like those offered by Robinhood, TD Ameritrade and E-Trade — to the day traders of late '90s. With no barriers to entry in trading costs, as well as the buying and selling of fractional shares of stocks, traders with little to no experience can get 30% returns, Cuban said. 

He was quick to point out the dot-com bubble lasted more than one year: "I have to keep reminding myself the internet bubble lasted multiple years. It went from 1995 to early 2000." 

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Cuban recounted a recent conversation he had with his 18-year-old niece, who spurred on by the stock market returns her friends were making, asked the businessman and investor what stocks she should pick. Cuban, who joined social media app TikTok this year is bombarded with questions about the market. TikTok has seen a rise in the number of creators exchanging investing advice on the app. 

Cuban told his niece to remember there is a reason someone is trying to sell you a stock. "You've always got to be careful and understand what you are doing," he said. But he added that this is an opportunity for his niece to learn how the market works. "You know, everyone is a genius in a bull market, and everybody is making money right now because of the Fed put, and that brings people in who otherwise wouldn't participate."

His advice is to use the opportunity to learn how to become a long-term investor.

"In this market you can be a trader, but in the longer term, traders typically end up losing all their money, and so you want to be an investor longer term and understand what you are doing," Cuban said.

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