As I was cleaning my desk clutter, I came across a Globe and Mail article titled, “Five reasons why value investing may never regain its appeal.” It appeared Aug. 27, 2019, after a decade in which growth stocks had significantly outperformed value stocks.
It isn’t unusual to see these types of headlines just before a major shift, but in this case, growth continued to outperform for another two years, leading to a market and speculative bubble in IPOs (initial public offerings) written about previously. I hope my writing helped you steer clear of the nonsense. The bubble popped, as they all do, over a year ago.
An example of headline risk was Fortune magazine’s August 2022 cover featuring a picture of Sam Bankman-Fried with the caption, “The next Warren Buffett?” To compare arguably the best investor of the past century with someone in the crypto space was vomitus. Cryptos are at best wild speculations and at worst complete scams. Bankman-Fried’s crypto empire collapsed two months later, and he has been indicted on numerous charges that if proven in court would eclipse Bernie Madoff’s loathsome misdeeds. (I refer to him as Sam Bankman-Fraud.)
Also indicted recently were eight “Wall Street Bets” scoundrels behind the meme stock craze. Meme was the name given to a group of heavily shorted failing companies. Allegedly, this group on Reddit electronically shouted about fantastic gains to be made buying the broken companies, forcing a short squeeze.
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The phenomenon largely occurred with people isolated at home during the early phases of COVID. Bored, they turned investing into a video game. The poster child meme was Game Stop (GME). I went on Reddit to see for myself and there were statements like “I’m never going to sell until it hits $10,000,” with a whole line of rocket ship emojis. Allegedly, the group doing the shouting were simultaneously selling, making a small fortune in a good old-fashioned pump and dump scheme. At the time I recall thinking, these guys are going to cost a lot of people a lot of money.
The death of value was a common sentiment a couple of years ago. One of the reasons stated in the article was, “The world is different.” An old investing saying is the most dangerous four words are, “This time is different.” Other reasons were that value was a bet against technology and Big Data made investing more efficient with less chance of identifying underpriced companies.
To be fair, the author’s list of 10 suggested stocks performed well, although paradoxically none were tech or biotech stocks, the hot growth areas of the day. In fact, his suggestions were decent valuation stocks and included Linamar, which I used in a past column to contrast with tech stocks.
Let’s have a look at what happened to the speculative stocks I have referenced during my five years writing for you. In a 2018 article titled, “Investing in speculations is an oxymoron,” I referenced four companies.
Long Blockchain changed its name from Long Island Iced Tea, a failing beverage company. Its price quadrupled in a day and continued upwards for a short period. It has been delisted for not providing financial reports.
Kodak announced it was going to make its own cryptocurrency, KodakCoin. Its price also quadrupled overnight. It is back down to where it was before the announcement.
Tilray, a cannabis company, went public at $17. When mentioned it was trading at $117. It went as high as $300 and is now down 99 per cent to $3.
Tesla was my most embarrassing speculative mention as it defied gravity for the longest time. It is still valued higher than when I mentioned it but is down 65 per cent from its peak.
In other articles, I mentioned Shopify, which dropped as much as 80 per cent before its current modest recovery. I also mentioned Rivian, an electric truck company that went public at $78 before selling its first truck. It immediately popped to $130 but has been straight downhill from there to $18.
In an example of how you can get lucky and make money on speculations, I wrote an article on how my son bought EHang at $14 and sold it a few months later at $74. It went on to $125 before collapsing to $4. It is now taking flight again. How high will it fly? I don’t care!
In the fall of 2020, I titled an article “Growth stocks have outperformed value stocks for a long time … but will it last?” I mentioned that growth stocks were about four times pricier than value. This article was timed almost perfectly with the peak of growth and speculative stocks. Early in 2022, I compared becoming an NHL star with becoming a successful public company. I mentioned that IPO really stood for it’s probably overpriced. Of 20 Canadian IPOs between July 2020 and November 2021, only three are above their IPO price and about half have been cut in half, or more.
Speculators are blaming the surge in interest rates, yet I would submit that the economy runs much better with four to 10 per cent interest than zero to four. All resources that are too cheap get wasted, including money. That should be obvious from the above examples. Having a reasonable cost of money motivates more judicious use of financial resources.
