#stockbubbles

Wall Street can often feel like a popularity contest. Every year the market has a darling stock or stocks that everyone agrees to be the flavor of the month (or year, or decade) and the stock(s) will dramatically rise regardless of fundamentals or other factors. Asset bubbles inflating and bursting are a recurring phenomenon in world economic history – the British South Sea Company bubble (1720), the British railway mania (1844-1846), the Nifty-Fifty bubble (1960’s), the gold bubble (1970’s), the Japanese stock market bubble (1980’s), the Dot Com bubble (1990’s), the housing bubble (2000’s). More recently we are seeing this same trend with some high growth stocks. While it is always a fun ride on the hype train it is not uncommon for these stocks to come crashing back to earth.

Let’s take a quick look at some interesting charts regarding Tesla (TSLA), a recent darling stock, highlighting some of the dangers of riding the hype train too long. Currently, Tesla is worth more than almost all the other car manufacturers combined as we can see in the chart below showing their market caps.

Looking at current auto sales we see the exact opposite story. Tesla accounts for a small portion of all cars sold. The next chart shows that the rest of the industry accounts for the vast majority of sales but Tesla is just a pittance in comparison.

These charts are not to say that Tesla is a bad investment (a surge in regulatory-credit revenue has been a major factor in Tesla’s streak of quarterly profits that has sent shares soaring) or that it can’t become a dominant auto manufacturer. All they suggest is that the stock price may have gotten ahead of itself and this could leave some investors in a bad position if the stock tumbles. As with any investment, it is important to understand the merits and risks of the investment. We have seen too many investors get wrapped up in the hype train of Wall Street and they often end up getting burned.

Disclosure: Investing involves risks, including the potential for loss of principal. There is no guarantee that any investment or strategy will be successful or meet its objectives. The investments discussed may not be suitable for all investors. Investments and strategies outlined in this blog are not provided as personalized investment advice and should be discussed with an advisor prior to implementation.

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

The WallStreetBets subreddits members making their YOLO bets with their stimies on GameStonk are asking; “Where are my tendies now”? Don’t ask if you didn’t understand that sentence but just look at these charts of GameStop (GME).

If you didn’t get a chance to see the “Coffee with Dr. Steve and Katie” we posted last week, check it out here. We discussed GameStop in more detail.

Ben Graham, who many consider the “father of value investing” and who wrote the classic The Intelligent Investor, said, “The typical experience of the speculator is one of temporary profit and ultimate loss”.  This holds even truer for those who joined the excitement later and are now facing large losses as the stock plummeted. 

Charles Kindleberger, in his book Manias, Panics, and Crashes, laid out the five stages of an asset bubble:

1. Displacement: Some kind of catalyst occurs that is recognized by early investors (i.e., the “smart money”) which causes them to start investing in an industry, country, or theme.
2. Boom: The narrative supporting the investment gains traction, and momentum grows.
3. Euphoria: The media begins covering the investment more broadly, and everyone becomes aware of this compelling opportunity. In the 1990s, it was cab drivers investing in internet stocks; today, it is contractors investing in bitcoin and Instacart drivers investing in Gamestop. Momentum rises dramatically.
4. Crisis: Early investors start to get out. The selling gains momentum as more investors exit the investment as prices move lower. The bubble bursts and “euphoria buying” is replaced by “panic selling.”
5. Revulsion: Media coverage becomes broadly negative, the asset becomes very unloved, and it can fall to irrationally low levels.

It appears we are in stage 4 (crisis) of this asset bubble with GME and watch-out for stage 5 (revulsion). The huge price swings had little or nothing to do with the actual value of the company (and many of the other stocks caught up in the trading frenzy). GME and some of the companies will need to make fundamental business changes to address the underlying weakness that caused them to be targeted for short sales in the first place or they will go out of business. Remember that creative destruction is good for the long-term well-being of the economy.

As an investor, the lesson for you might be to tune out market mania over “hot stocks,” especially when there is little to back up the sudden interest other than speculation. The wisest course is often to build a portfolio that is appropriate for your risk tolerance, time frame, and personal situation and let your portfolio pursue growth over the long term. This strategy may not be as exciting as the wild ups and downs of stocks in the spotlight, but it’s more likely to help you reach your long-term goals.

Disclosure:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Benefit Financial Services Group (“BFSG”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BFSG is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BFSG’s current written disclosure Brochure discussing our advisory services and fees is available upon request.

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.