Finance – Latitude Post

A Look At US Financial Markets Over The Next 8 Years

Posted on August 8, 2025August 8, 2025 by Nicholas Peart

“A mania first takes out those that bet against it and then those that bet with it” Jim Rodgers

DISCLAIMER: The following article contains just my opinions and thoughts regarding where I think US financial markets may be heading over the next 8 years. I am not a qualified financial adviser so please don’t blindly take my words as gospel. For any financial advice, please seek a qualified financial adviser.

In this article I will be focusing on US financial markets and their trajectory over the coming 8 years until 2033. The USA has the largest economy in the world and over the last 16-17 years since the Global Financial Crisis (GFC), its stock market has been a stellar performer. Back in March 2009, the S&P 500 index (that is the 500 largest US listed stocks by market capitalisation) was trading on a valuation of below 700 points. As I write this, the index is currently trading at over 6,300 points. This is a more than 9-fold gain during that period of time. Even more impressive is the performance of the NASDAQ index (which consists of many of the largest US technology companies) over that same time frame. In March 2009, the NASDAQ index was trading below 1500 points. Today it is trading above 21,000 points. This is a more than 14-fold gain during that period of time. Seriously mindblowing performance.

Yet as impressive as all this has been, several investors and analysts have warned about the US market being very overvalued and priced to perfection. And they are right to be concerned. The US financial markets alone make up just over 70% of the entire global stock market. Back in the 1980s, that share was only around 30% (1).

In addition to this, and more alarming, the current Shiller PE ratio (calculated as the price divided by the average of ten years of earning adjusted for inflation) of the S&P 500 index is at over 38 (2). This is historically very high. Over the last 124 years, the mean Shiller PE rate of the S&P 500 is just over 17. Thus the current ratio is more than double the average. That being said it is not at an all time high. This was reached back in December 1999, close to the peak of the DotCom bubble, when the ratio went above 44.

The AI And Emerging Technologies Tailwind

One big tailwind for the current high valuation of the US stock market is the current Artificial Intelligence (AI) boom. Many listed companies involved in AI have seen their stock prices fly over the last couple of years and this has contributed in a big way to the high overall valuation of the main US stock market indices. All of the so-called Magnificent 7 stocks including Tesla have trillion dollar market caps. The company Nvidia, arguably the poster child of this current AI boom, is now trading on a market cap of $4.4 trillion. This is the highest valuation of all the Mag 7 stocks including Apple and Microsoft. But even outside of the Mag 7, there are many stocks trading on absolutely bonkers valuations with multi-billion dollar market caps. One golden example is the software company Palantir. This stock has a current market cap of over $430bn and is trading on a PE of 587. Now such a PE would not matter if it were some junior small cap stock with a market cap below $100m, but this is a stock with a market cap vastly larger than any company on the London Stock Exchange.

However, even though a lot of investors and financial analysts are concerned about the current valuations of many of these stocks, I actually think that these valuations can get even more elevated in the short to medium term. And the reason for this is almost purely because of the current AI tailwind and narrative. The growth and exponential development of AI is very real and this will only continue to be turbocharged into the coming months and years. In many ways this is far bigger than those mid to late 90s early days of the internet. There is no doubt in anybody’s mind that AI is going to have an absolutely transformational effect on society and the way we all live. We can already see the signs via current AI models like ChatGPT and Google’s Gemini. To a lot of people, the growth and future trajectory of AI has no precedent. There is nothing from the past that one can really compare it to; not the formative growth years of the internet or even the Industrial Revolution. That alone is a very powerful thing.

And although it is AI that is on everyone’s mind right now, I can see other important emerging technologies being on people’s lips. One such technology is Quantum Computing. This is a technology I can see developing very fast and very soon becoming just as talked about as AI. It will not just revolutionise computing, it will also help massively with further speeding up the development of AI. So although the current AI tailwind is very strong, I can see it gaining even more traction as all these other emerging technologies like Quantum Computing enter the public consciousness. And this is what will likely further elevate all those stocks that have already appreciated substantially in value.

A Shiller PE Ratio Of 70

Although the current Shiller PE Ratio of 38 for the S&P 500 is historically high, I can see it going even higher over the next few years and far surpassing its all time high of 44. The last two years have seen AI and AI related stocks soar hugely and I can see the next 3 years being even more crazy. In fact, the next three years will be on mind altering steroids. The current AI tailwind will soon become the “AI and Quantum Computing” tailwind and then later the “AI, Quantum Computing, Robotics, Nanotech and 3D/4D Printing” tailwind. All of this will push valuations for all those already hot darling stocks even further into the stratosphere. So do not be surprised to see Palantir with a $1tn plus market cap and Nvidia exceed a market cap of $10tn. This tailwind and the supercharged positive feedback loops will likely result in this new demented environment. Over the next few years there will be a lot of market volatility and a few mini market corrections (a la Trump tarifs circa April 25) along the way, but all these corrections will be very short lived and the US stock market will keep breaching new all time highs. Meanwhile, incomes will barely increase and the wealth inequality gap will get even more extreme. If this all occurs I think its a real possibility that by 2028, the NASDAQ hits an all time high of close to 50,000 points and the S&P 500 goes to 14-15,000 points. And the Shiller PE Ratio will be at around 70 points; at over 25 points higher than its all time high. Analysts fixated on valuations are already sounding alarm bells about the current high valuation of the US market. Yet over the next few years they will be screaming even more and looking in disbelief as those already high valuations simply further inflate into infinity. Yet I am going to make a prediction and say that at some point in the first half of 2028 the absolute top of the US market will be reached and then what will happen afterwards will be incredibly seismic and dangerous.

The Biggest Financial Crisis In US History

When the S&P 500 and NASDAQ indices both reach their all time highs in the first half of 2028, this will precipitate the biggest financial crash and crisis in the history of the USA. It will far eclipse the 2008-9 Global Financial Crisis and also the 1929 Financial Crash and ensuing Depression. It’s possible that the NASDAQ index will fall sharply by over 50-60% in 2028 alone. There will be a huge stampede-like sell off in all those hot darling tech stops that dominated the zeitgeist for many years. I can see the DJT government, as it approaches the fag end of its current term, being in a state of genuine shock and completely taken aback by the sudden stock market plummeting with no abating in site. It will be a huge humiliation, especially to Trump himself who over the last few years took great pride in the seemingly neverending moonshooting valuations of the US stock market and the most popular tech stocks. It will likely also be the final major blow to his popularity even amongst his most staunch supporters. This major stock market crash will also occur at the same time when the USA has its first major government debt crisis and even defaults on a large portion of its debt. This will only increase the severity of the stock market crash with confidence dropping like a stone. During the 2008-9 GFC, government bailouts were given to companies that faced the real risk of collapsing. Central banks reduced interest rates to near zero and began massive rounds of Quantitative Easing (QE) to stimulate the economy. Such measures will prove deeply unpopular this time around. Public trust in government institutions and politicians is already at a very low level, but by 2028 when the financial crash is in full swing it will hit rock bottom. This will all result in irrevocable damage to the popularity of the DJT government and will pave the way for a stridently left wing leader and government to lead the USA post Trump. The USA may be historically the cradle of capitalism, but I can foresee mass disillusionment in capitalism in the wake of this seismic financial crash. It will hurt and affect so many people and there will be a fervently revolutionary spirit in the air where the new scapegoats will be, aside from the Trump government, all the very wealthy tech entrepreneurs, founders and executives of those company’s whose stock prices were soaring to dizzy heights before crashing back down to earth.

A Parting To The Left And The Scapegoating And Demonisation Of The Uber Wealthy

So when the US elections occur later in the second half of 2028, I predict that the new leader and government of the USA will be radically left wing. And the big reason for such a government coming into power, aside from the financial crash manifesting in a devastating way, will be the fact that despite there being an unbelievable stock market boom over the few preceding years, the levels of wealth inequality in the country reached dangerously high levels and the current DJT government did next to nothing to address this. They got too obsessed and blinded by the stock market boom (“America Is Booming!”) that they neglected and failed to address the concerns of many people.

This new left wing government will be just as extreme as the current DJT government, but in the complete opposite direction politically; like a pendulum swinging violently the other way. Their pre-victory campaign in the few months leading up to the election results day and in those months when the stock market is terminally crashing and the US defaults on its debt, will be focused heavily on the corruption, negligence and incompetence of the DJT government, the sky high levels of wealth inequality and a full on demonisation of the wealthy elite/oligarch class. The left leaning leader of this incoming government will be just as fiery as Trump himself; somebody with teeth and bite who suffers no fools and takes no nonsense. This will not be a puppet leader. However, although this may be seen as a welcome change by many people, it will be equally if not more unstable than the years of the preceding DJT government. By this point in the USA, there will be a huge revolutionary pitchfork movement against “the elite” and those with vast amounts of wealth. It will be almost dangerous to be in that category, especially if you are a high profile figure.

US Financial Markets In An Aggressive Multi-Year Long Bear Market

As the new left wing administration takes over, I can see the financial crash manifesting into a brutal multi-year long bear market with seemingly no end in sight. If 2028 is marked by a 50-70% fall in the major US stock market indices, 2029 will be marked by another chunky 40-50% fall and the same for 2030, 2031 etc. I think the bleeding will continue all the way into 2033. There will be no precedent in this epic multi-year long fall. Not even the years after the 1929 crash. But this is what happens when stock markets get elevated to extremely high levels. A Shiller PE Ratio of 70 for the S&P 500 index is beyond the realms of nuts. The US government debt default along with a new anti-big business/anti oligarch administration will completely crush investor confidence. The US economy will go from being an economic shining star to being an economic basket case.

A Post-Trump Era of Greater Regulatory Scrutiny

One major change that will occur when this new left wing government comes into power is that it will bring in a era of far greater regulatory scrutiny then ever and siding much more with the people than with the wealthy elites. This will be a huge change to the current landscape of very lax financial regulation and instances of financial fraud happening on a regular basis and often going unchecked and unpunished. The investor and infamous short-seller Jim Chanos famously called this period, “The Golden Age Of Fraud” back in 2020 (3). The wheels of the Golden Age Of Fraud continue to turn to this day and will only get even more extreme in the coming months and years all the way up to the 2028 financial crash.

When the previous GFC occurred, only a handful of people were punished and the subsequent years of Zero Interest Rate Policy (ZIRP) and QE planted the seeds for an asset and stock market boom that still continues to this day and has resulted in a level of wealth inequality not seen before the famous 1929 stock market crash. From 2028, I can foresee the new administration passing lots of new laws protecting investors and massively curbing the kinds of excesses that took place in the past. This will also go hand in hand with a program of massive wealth redistribution and a strengthening and overhaul of the existing US Securities and Exchange Commission (SEC).

Investing From 2028-2033

The financial crisis in the USA from 2028 will be brutal. Aside from all the hot darling stocks that will be getting crushed as this unfolds, one asset class I would not want to be anywhere near are US treasuries. When the USA defaults on its government debt, this is not somewhere I would want to put my money.

When the crash occurs everything will go down including more defensive stocks with a low beta that barely rode the wave of the stock market boom of the preceding years. Although their valuations will be much more stable and robust and impervious to the rapid falls many of the golden tech stocks will be experiencing.

I have long been banging the drum for gold in the face of this very possible scenario. Over the last couple of years the price of gold has been creeping up. I find it interesting that during this period of the major US stock market indices hitting new highs, the price of gold has also been breaching new highs. This is quite unusual, but to me it signifies that much of the current stock market boom is artificial and there are real concerns, along with the ever expanding US government debt pile, that it is simply not sustainable. As I already stated, trust in government institutions and politicians is at a very low level and when trust is low this is often a tailwind for something like gold.

I think that as the US stock market continues to boom into the next few years, the gold price will also continue to creep higher. However, I think the period from 2028-2033 will be the period when the gold price will really start to go on an epic tear. Yet this will first manifest during the period when the US defaults on its government debt and faith in the US dollar begins to plummet. The price of gold will be rising massively in US dollars, but what does this mean when faith in the US dollar is declining? It simply means that gold is doing what it is historically always meant to be doing and that is being a store of value. This is not the same function as a hot growth stock. It isn’t about making money. It is about protecting and preserving wealth.

By Nicholas Peart

8th August 2025

References/Links:

(1) Is The US Market Due A Correction?

(2) Shiller PE Ratio of the S&P 500 index over the last 124 years

(3) We Are In The Golden Age Of Fraud

Beware Of The Comment Scam Ring

Posted on July 31, 2025July 31, 2025 by Nicholas Peart

The “Comment Scam Ring” (CSR) is an alarming phenomenon that has become a huge problem on social media. It is most common in the comments section of various popular finance, investing and cryptocurrency related videos on YouTube. Below, I am sharing a random example of one of many such CSRs, which I extracted from the comments section of a video by a popular finance influencer on YouTube who will remain nameless…

Such CSRs prey on unsuspecting and financially inexperienced individuals by creating a false and deceptive narrative of success by luring them into financial schemes that are completely fraudulent. In the case of the above example, a fake non-existent financial expert/adviser called Jessica Dawn Walters is used.

I broached this issue recently with ChatGPT to get some information. The way such a CSR operates is as follows…

Firstly, it starts with “The Setup”, which is the first original comment. In this case…“As an investing enthusiast… I’ve been sitting on over $545K equity…”. This is the “bait comment”. The individual making the comment tries to come across as a genuine investor with a sizeable although not enormous sum of money (In this case $545k to create a false sense of honesty and trust) that they are looking to invest, but are not sure what to do. The goal of this original comment is to be as convincing as possible by targeting individuals in a similar situation.

That first comment is followed by the first reply in the form of “The Helpful Advice”…. “I lack the time… I’ve enlisted the services of a fiduciary…”. The purpose of this reply is to create the “idea” of a trustworthy professional. Many times a “fiduciary” is used that paints a picture of someone responsible and legally bound to work in your interest. This sets the stage for the next step, which is recommending a fake adviser.

But before we get to that stage, there is “The Curious Observer” comment in the second reply….“How can I participate in this?…”. This is the “fake social proof”. Another fake account pretending to be a normal curious person asking for more info. This is simply designed to make the whole comment thread more believable to unsuspecting individuals.

Then we arrive at the fourth stage of this CSR; the third reply in the form of “The Pitch”. This is when the name of the fake financial adviser is dropped…“I’ve stuck with Jessica Dawn Walters for about five years…”. A plain and realistic-sounding name is used to make it all look genuine. However, those who try to research the name via Google will invariably find fake websites and LinkedIn Profiles as well as fake WhatsApp or Telegram numbers.

This is then followed by the final stage in the thread or “The Closer”. In this case in the fourth reply, a fake account comments, “Thank you for this amazing tip…”, further stating that the fake advisor has been contacted and thus adding a deceptive layer of legitimacy to this whole fraudulent operation. Sometimes such a CSR can be on steroids where there are many fake closer comments all endorsing the fake adviser and stating that they have scheduled a call etc.

To many seasoned investors and financial professionals such CSRs instantly appear deceptive and unconvincing. However, there are many individuals who sadly fall for such scams. The relatability, fake sense of trust as well as the triggering of the primal FOMO (Fear Of Missing Out) bug in such people leads them down this shady avenue. Such scams usually result in situations where these victims end up paying up-front “consulting” fees and falling for Ponzi scheme style “high yield” investment offers. In even more severe cases, once one of the victims has engaged in such acts they may be emotionally manipulated via further follow-up contacts and other too-good-to-be-true “returns” schemes to keep them parting with more of their money.

What amazes me is the lack of pro-activity (and action full stop) in dealing with such CSRs by the content moderation teams of the YouTube segment of Alphabet (the parent company of YouTube). It seems that much of YouTube’s content moderation system is automated thus allowing such scams to persist. But sadly such scams are common throughout the entire world wide web, which, since it became mass adopted almost 30 years ago, continues to be a messy wild west space. We can only hope that one day in the future the internet becomes a cleaner and safer space to interact in and where all the harmful and nefarious elements are kept out.

By Nicholas Peart

31st July 2025

“WHAT WERE YOU THINKING?”: The Unstoppable Gravity Defying Rise Of The Stock Price Of Nvidia

Posted on February 22, 2024 by Nicholas Peart

The stock price of the much hyped American technology company Nvidia has been on a truly staggering rise since September 2022 that doesn’t seem to be slowing down anytime soon. In fact, since the company posted its latest financial results yesterday, the company’s stock price is currently trading at close to it’s all time high up nearly 10% during current after hours market trading.

On 1st September 2022, the share price of Nvidia was trading at around $121 a share. A little earlier this month, the share price hit an all time high of $746 a share representing more than 6 times increase in the share price of Nvidia in less than 18 months. When the company stock hit it’s all time high it had a market capitalization of more than $1.8tn. With a current after hours market trading share price of $736, the current market cap is very close to that figure.

The latest results were on the surface very impressive. For the year ending on January 28th 2024, total revenue was $60.922bn. This is more than double the total revenue of $26.974bn for the previous year ending on January 29th 2023. Digging a bit deeper into the breakdown of its latest reported total revenue figure of $60.922bn, $47.525bn of this amount was generated from its Data Center business. This figure represents a more than 200% increase compared with the previous year figure of $15.005bn for this segment of Nvidia. A spectacular increase indeed.

What is interesting though when comparing the revenue breakdown figures for both the year ending on January 28th 2024 and the year ending on January 29th 2023 is how relatively flat the other business segments of Nvidia have been. For example, the revenue generated from its Gaming business grew from $9.067bn to $10.447bn representing a more sober increase of just 15%. In fact, for the year ending January 30th 2022, the revenue from its Gaming business was $12.426bn meaning that the revenue from its Gaming business for the year ending on January 29th 2023 actually decreased by 27%.

Revenue from its Professional Visualisation business increased by just 0.58% from $1.544bn on January 29th 2023 to $1.553bn on January 28th 2024. Interestingly, for the year ending January 30th 2022, revenue from this segment was higher at $2.111bn meaning that the current revenue from this segment is down by more than 25% from two years ago.

Pretty much the vast majority of Nvidia’s revenue growth has come from its Data Centre business. However, the important question is whether the current share price and market cap of Nvidia is justified?

Here is the problem I have. Although it is impressive for any company to more than double revenues in the space of a year, the current total revenue figure of $60.922bn is peanuts next to a market cap of $1.8tn. The share price is trading at close to 30 times total revenue. I used to think that a company trading at 10 times revenues was madness, but this company surely wins Olympic Gold for the utter insanity of its current market cap. And what is even more mind blowing here is that this is a company with a market cap of more than half of the UK’s GDP. This is not some cheeky small cap stock.

Of course, there will be some who push back on my analysis with words along the lines of Nvidia being at ‘the forefront of the AI Revolution’, etc. But none of this matters. We’ve been here before. Bubbles of this scale never end well. In fact, I will leave you with the words of Scott McNealy, the former CEO of Sun Microsystems that was one of the hot stocks during the dotcom boom and bust of the late 1990s and early 2000s…

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

By Nicholas Peart

22nd February 2024

LINKS/FURTHER READING:

NVIDIA Latest 10-K Form For The Fiscal Year Ended January 28th 2024

Searching For Honesty In Financial Markets And Why Short Sellers Should Not Be Demonised

Posted on January 3, 2024January 12, 2024 by Nicholas Peart

Today, I think there are too many people dabbling in the stock market and investing in highly speculative assets. Despite the cratering in stock prices in 2022 and the very brief crash in 2020, we are still in one of the longest bull markets of all time that began in 2009.

But whether we are in a bull market or not, I am still blown away by the valuations of many stocks and other assets and the sheer amount of dumb money still in the market. Over three years ago, the well known short seller Jim Chanos commented that, ‘We are in the golden age of fraud’. In an interview with the Financial Times from July 2020, Chanos commented on the market environment at the time as; “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He further expands on this by getting to the root of how such an environment was created;

‘ a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was“. ‘

In this paragraph Chanos nails beautifully the problem not just with the present state of financial markets and the industry as a whole, but with the current zeitgeist. The post truth world of ‘my facts are your fake news’ where real truth and wisdom has been forsaken is a real problem and dangerous. The Silicon Valley “fake it until you make it” culture has been exacerbated by the huge tail wind of a decade plus of zero percent interest rates and mountains of cheap and easy money. Such a background of very loose monetary policy has enabled many startups and companies with shoddy fundamentals that should have gone bust a long time ago to remain a going concern and in some cases even thrive with massively bloated market valuations. During this time wild levels of risk taking and speculation are rampant resulting in highly distorted and inefficient markets. Huge bubbles in highly dubious securities emerge with many dishonest charlatans with large followings on social media pumping these garbage entities to naive and unsuspecting investors. When the bubble eventually bursts it is those same impressionable investors who are left holding the bag. In the worst cases, some bet with money they didn’t have and couldn’t afford to lose. These incidents are especially common in the cryptocurrencies space and also for so called meme stocks – stocks made popular by a large following on social media. Often these stocks have market valuations completely divorced from their true intrinsic value. In some cases these companies should be insolvent, but are kept going by a zealous cult like following of investors happy to pay any price without questioning the fundamentals and integrity of the companies.

Short sellers often get a bad rep. In some cases this is justified. There are indeed short sellers who are nefarious and have a vulture-like mindset. However, there are those like Jim Chanos who play a very crucial role in the markets by searching for companies that are committing fraud and lying to investors. And they are often onto those companies at a very early stage way before the financial regulators get involved. As Chanos comically states, these regulators ‘will tell you after the company has collapsed what the problem was‘.

Chanos is famous for his large bet against Enron. At the time it was a darling stock and very popular with investors, but Chanos after having undertaken a deep fundamental analysis on the stock realised that the company was cooking its books and that at some point this would land the company in serious trouble. Whilst numerous financial commentators would be speaking glowingly and talking up the stock, Chanos, however, knew that something was rotten in the state of Denmark. The financial regulators were asleep at the wheel only acting after the fact.

Today we are still living in the golden age of fraud. Despite the 2022 wobble in equity prices and inflation spikes and rapid increases in interest rates, there are still too many investors playing foolish games who haven’t learnt their lesson. There are still zombie companies and entities trading on eye watering market valuations and worse, companies still trading at huge valuations that are committing fraud and the financial regulators continue to do next to nothing. This is precisely why short sellers like Jim Chanos should not be vilified. In fact, quite the opposite. They should be revered and respected. They search for honesty in the markets, pointing out the bad actors and the companies engaging in crooked behaviour. And I have no problem when they make money. Even when they make a lot of money. It is much easier to go long on a stock than it is to go short. Short selling is a difficult and highly risky venture. Even if you have spotted a company engaging in fraud and other egregious activity, the difficulty is getting the timing right when betting against it. The market valuation of the company may continue to remain irrationally high for a very long time creating huge losses for those that chose to bet against it. Short selling can be a very lonely path and often a financially ruinous one too.

Nicholas Peart

January 3rd 2024

LINKS:

Financial Time article: Jim Chanos: ‘We are in the golden age of fraud’ July 24th 2020 (https://www.ft.com/content/ccb46309-bba4-4fb7-b3fa-ecb17ea0e9cf)

Image: https://pixabay.com/photos/reading-glasses-book-read-4330761/

Is One Of The Longest Bull Markets In History About To End?

Posted on January 31, 2022January 31, 2022 by Nicholas Peart

The month of January has been a rather volatile one for financial markets. In particular, in the USA, where the markets over there are heavy with technology companies with enormous market valuations; a few of these companies, including Apple, Microsoft, Amazon and Alphabet, currently have market valuations in the trillions of dollars. Already back in 2019, when the NASDAQ index, which includes those megacap tech names, was hovering around 8000 points I wrote an article where I expressed my concerns that I thought the index was looking very frothy. In 2009, toward the end of the Financial Crisis, the NASDAQ was below 1500 points. In a decade it had increased over five times in value. At the height of the 1999-2000 dotcom bubble, the NASDAQ hit an at the time all-time high of over 5000 points. It would be another fifteen years before the NASDAQ would breach 5000 points again.

Back in 2019, some analysts expressed concerns about the heady valuation of several US tech stocks and that with the NASDAQ trading at over 8000 points, it was ripe for a correction. Towards the end of February the following year, those analysts got their wish when global markets began to dramatically correct in response to the outbreak of the COVID-19 pandemic. Investors began to panic and growth/tech heavy indices like the NASDAQ began to drop in value. In January of 2020, the NASDAQ had reach an at the time all time high of over 9000 points. By March of that year, it was trading in the 6000s.

Although, those who had been predicting a crash the previous year may have felt vindicated for a brief moment, very few could have foreseen the response by the Federal Reserve (Fed) and how it would promptly intervene with a dramatic increase in the US money supply and an enormous expansion of the Fed’s balance sheet. As a consequence, the NASDAQ duly rebounded from March 2020 and would embark on a mind-blowing run lasting many months. By November 2021, the NASDAQ hit a fresh all time high of over 16,000 points; more than doubling from it’s mid March 2020 level and almost doubling from it’s 8000+ level from back in 2019 when I wrote my article expressing concerns about it’s then heady valuation.

When the pandemic began to sink in and the Fed reacted via it’s huge financial stimulus programme essentially flooding the US economy with lots of new money, investors began to favour a certain group of stocks that became all the rage as they thought would thrive in this new pandemic environment. Governments around the world imposed multi-month long lockdowns and for many people at the time, there was a feeling that this pandemic would never end. Thus investors turned to technology stocks; stocks investors concluded would benefit the most from a stay-at-home environment. These stocks, already commanding rich valuations before the start of the pandemic, began to get even more crazy. At the same time, boring old school blue chip value stocks began to sell off even more. The travel and hospitality sector suffered greatly by global lockdowns and travel restrictions. The oil and gas industry too had a tough time with the price of a barrel of crude oil briefly entering negative territory. Sentiment in both those two sectors was completely shot to pieces, whilst the technology sector was in full on mania mode. But it wasn’t just the big tech names like Microsoft, Apple and Alphabet that were doing well, a new crop of technology stocks that became darlings during the pandemic, such as Zoom and Peloton, went on an epic tear.

As 2020 turned to 2021, this madness showed no signs of abating. In fact it all reached a brand new level of craziness. With many in the US receiving their COVID-19 financial stimulus cheques, which were originally intended to alleviate the financial burdens of those affected by the pandemic, a large portion of those cheques were used for speculation in the markets. A handful of stocks began to command valuations that just simply made no sense. One example was the struggling video game retailer, Gamestop. At the time it was one of the most heavily shorted stocks in the country. Until a group of investors from the social media site Reddit began to drive up the price of the stock massively with the intention of sticking it to the hedge funds who had large short positions on the stock. In the month of January 2021, Gamestop stock rocketed in value from just under $20 a share to over $300 before crashing to around $40 the following month. Many naïve and inexperienced investors got suckered into this micro rally and got badly burnt on the way down. It didn’t matter that this was fundamentally a worthless stock with no credibility.

In addition to those shenanigans, the beginning of 2021 saw another heady bull market emerging in the cryptocurrencies space with the price of Bitcoin entering the new year on a new high. But the increase in the price of Bitcoin during this period paled in comparison to other even more speculative areas of the crypto space. One of these was the booming popularity of NFTs or Non Fungible Tokens. These tokens are digital files that can be bought and sold with certain cryptocurrencies. During the first few months of 2021 this area of the market reached a complete fever pitch with a some individual NFTs even fetching millions of dollars. An NFT by an artist called Beeple fetched over $60m – an eyewatering amount of money; the kind of money that would exceed even the kind of money fetched for some of the best known and highly prized paintings by the most famous old masters of the ages.

Yet by the end of the year, cracks were already starting to appear. The last 13 years since the Financial Crisis has been dominated by a period of extremely loose monetary policy. It is no surprise that such a long period of rock bottom interest rates has led to one of the longest and most spectacular bull markets in history. And because of this it feels artificial. Wages have not gone up anywhere near the same level during this time period. In fact they have been rather stagnant. This has resulted in the USA experiencing a level of inequality not last seen since the 1920s. Or more specifically, the end of the 1920s. The so called Roaring Twenties ended with an epic stock market crash leading to a brutal multi-year long Depression. The Dow Jones Industrial Average (DJIA) hit a high of over 6000 points in August 1929, at the apex of the 1920s stock market bubble. In December 1920, the DJIA was just over 1000 points. When the this near decade long bubble burst during the last few months of 1929, the DJIA continued to crumble over the next few years during the Depression reaching just 910 points in May 1932. This was less than the low breached by the DJIA in 1920. In a little under a few years, all the gains the DJIA had accumulated had been more than wiped out. The next time the DJIA went over 6000 points was in 1959; a staggering thirty years since that level was last reached.

Many investors and analysts like to compare the current stock market boom, especially over the last few years, with the dotcom boom of the late 1990s. Whilst there are many similarities, namely with all the exuberant valuations of many tech stocks with poor fundamentals, I find the stock market boom of the Roaring Twenties a better comparison. This is especially true when measuring inequality in the USA over a 100-120 period. The incredibly loose monetary policy over the last 13 years had made this current bubble not only one of the largest in financial history, but also one of the most dangerous. Total US government debt before the 2008 Financial Crisis was already very high. However, between Q1 2008 and Q3 2021, total US government debt has near trippled from $9.4tn to $28.4tn. This is an astonishing increase for such a comparatively brief time period in US history.

During the last year, inflation has began to rear its ugly head. Some have been taken by surprise by this inflation, but I am anything but surprised. This was a long time coming. It is amazing that it has taken so long to appear. Of course, the super lax monetary policy of the last 13 years has seen incredible asset price inflation, but not so much consumer price inflation. But this all began to change last year when the US rate of inflation hit 6.8%, it’s highest level since 1982. The Federal Reserve now finds itself in a difficult position as even just a very modest raise in interest rates can have reverberating effects on the US stock market and economy as a whole. Over a decade of rock bottom interests in the US has, as already stated, almost tripled the total amount of US government debt and created a stock market bubble of absolutely epic proportions. In November 2008, the NASDAQ was trading below 1500 points. In November 2021, exactly 13 years later, the NASDAQ traded above 16,000 points. This is a more than ten-fold increase of absolutely dazzling asset price inflation. So much is now at stake, yet this bull market has never looked more fragile.

As of now, US interest rates still stand at zero. However, the last month has seen the NASDAQ fall quite sharply in value. By the end of last week, the NASDAQ was trading at 13770 points. Whilst this is a not inconsiderable drop from the 16,000 points plus high of last November, it is still more than double the low it reached during the brief stock market correction of February-April 2020. Moreover, it is still more than 9 times the value that it was in November 2008. What has been interesting is that the NASDAQ falls of the last month occurred before any interest rate hikes. The Fed intends to raise interest rates in tiny increments. However, the real question here is how much of a problem will inflation continue to be? This is where the Fed under Jerome Powell has really been asleep at the wheel completely underestimating the long term consequences of a decade plus of uber low interest rates, quantitative easing and cheap and easy money. Some economists make forecasts as if their projections will come into fruition with complete certainty. Yet the truth is no one can predict the future, regardless of one’s credentials and brain power. Not so long ago, the prevailing narrative was that inflation would be ‘transitory’. I didn’t and still today don’t agree with this narrative. I also don’t believe that the sole root of this inflation is the supply side shocks induced by COVID-19. As I have already mentioned, I am simply just surprised that, after over a decade of very loose monetary policy, it has taken so long to rear it’s ugly head.

What can really cause the current bubble to unwind much more is precisely if inflation continues to be a much longer term headache. The Fed may want to only slowly increase rates by small amounts, but what happens if inflation were to get worse and go into double digits? If inflation were to get out of control, I suspect that the Fed would have to increase interest rates by much more than it originally intended. This would bring an abrupt end to the cheap money era that has prevailed for so long. The biggest winners of this era have been growth stocks – particularly those in the technology sector. Invariably, companies with weak fundamentals would be trading on gargantuan market valuations. These companies would not be making any money and would be burning through cash. Yet often investors would be attracted to them by the story they projected rather than doing a deep dive into their financial statements. The cheap money era has been particularly favourable for startup companies not even publicly listed yet. It wouldn’t matter whether or not these companies were making any money. With so much cheap money sloshing about Venture Capitalist funds would throw ever more money towards them. In such an environment valuations do not seem to matter. And this is why I find this current rise in inflation very interesting as there is every chance that it will force the Fed to raise interest rates by much more than it was expecting thus bringing an end to this party. All of a sudden valuations will actually start to matter and all those companies that had heady valuations without ever making a profit will be in real trouble.

Already some of the darling stocks of the pandemic have had drawdowns of more than 50%. The video teleconferencing platform Zoom, which became increasingly popular as the pandemic unfolded, saw it’s stock motor from $76 at the beginning of January 2020 to a peak of over $550 in November of that year. Last week the stock traded below $140. The other darling of the pandemic, the exercise equipment and media company Peloton, saw it’s stock increase from around $30 at the very start of 2020 to over $160 just before the end of that year. Today it currently trades at $25 more than wiping out it’s 2020 gains.

The larger and more robust tech titans like Apple, Microsoft and Amazon have also experienced drops during the last month but they have overall still managed to hold on to their mega valuations. Apple recently hit a market cap of $3tn making it the most valuable company by market cap on the planet. At the beginning of the year it traded at over $180. Today, it’s trading at $170 with a market cap of nearly $2.8tn. It was only in 2018, when Apple became the first company to reach a $1tn market cap. In just a few years it has trebled its market cap. This is simply amazing growth for such a juggernaut of a company. Yet Apple is not cut from the same cloth of the more speculative tech stocks. Where Apple substantially differs is that it is a colossal cash generating machine of a company. Apple has a very rock solid moat and phenomenal pricing power. Even with at a near $2.8tn market cap, it currently trades on a not unreasonable PE of 28. Apple and the other tech stocks with solid cashflows that don’t need to raise money, will likely fare much better, despite their rich market caps, than the more fundamentally shaky tech stocks that still don’t generate adequate cash flows. However, Apple is not completely immune from any future shocks. I suspect that a continued rise in inflation will not only put a bigger strain on the finances of consumers, it will also further inflate the prices of important raw materials that are integral to Apple products. There could also be unforeseen future problems in China that severely affect the manufacturing capacity of Apple products.

Over the last 13 years whenever there has been a sharp correction in US equity markets it wouldn’t last for very long. The Fed would promptly intervene by pumping liquidity and thus causing the markets to sharply recover all it’s lost gains. The bull market would continue to just hit new highs. It is because of this that the USA still hasn’t experienced a prolonged bear market since the last Financial Crisis. For some time investors have simply taken it for granted that the Fed would just simply come to the rescue whenever there was any major market turbulence and stocks would duly rebound. But what if this time, the Fed finds that it has limited options to calm a plunging stock market? Higher than predicted inflation will almost certainly force the Fed to substantially increase interest rates. Money at much higher rates will cease to be cheap and the market, like a raging drug addict, will find that it is unable to get it’s usual fix of central bank stimulus. I suspect this will all have the affect of leading to markets being volatile and plunging to bigger lows over a much larger time frame leading to a bear market of many months or even years.

Don’t think the tech heavy US markets could experience a painful multi-year long bear market? Well, think again. It took almost 30 years for the Dow Jones Industrial Average to reach it’s all time high reached at the height of the Roaring Twenties stock market boom. When the dotcom bubble of the late 1990s burst in 2000, it took the NASDAQ 15 years to reach it’s all time high reached at the height of that bubble. Some stock market indices never again reach their all time high. Japan in the 1980s experienced an absolutely wild stock market and real estate boom. At the very end of that decade, the Nikkei 225, was trading at an all time high at over 38,000 points. Over the next year in 1990, the Nikkei 225 almost halved in value and over the next several years drifted downwards eventually bottoming below 8,000 points in 2003. The Nikkei has since recovered and as of today trades at around 27,000 points. Yet this is still short of it’s all time high it reached more than thirty years ago.

By Nicholas Peart

January 31st 2022

LINKS:

https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

https://fred.stlouisfed.org/series/GFDEBTN/

https://fred.stlouisfed.org/series/M2SL

US Stock Markets Are Looking Frothy

https://www.theguardian.com/business/2021/dec/10/us-inflation-rate-rise-2021-highest-increase-since-1982

Image: nck_gsl

Why Going For That Big Short May Not Be So Smart

Posted on August 10, 2021 by Nicholas Peart

The economist John Maynard Keynes said it best with his immortal words about financial markets being able to stay irrational longer than one can stay solvent. I think it was Keynes who said those words yet it doesn’t matter. What matters is how important and powerful those words are. I personally think these are some of the most important words of advice for any investor whether they are a novice or seasoned. One may have complete confidence and conviction in a security they are investing in yet there is always the chance that things don’t go according to plan regardless of how much due diligence they may have done on it.

The Big Short is a well known book by Michael Lewis, which was later made into a successful film. The book is about an investor and fund manager named Michael Burry who places an enormous bet against subprime mortgage bonds. He was one of a small handful of investors who at the time discovered how rotten those bonds were and how they had the power to create an enormous financial crisis, which they eventually did in 2007-8. He placed his bet relatively early in around 2005. At the time, it was seen as a rather contrarian thing to do as the majority of people in the financial world were amazingly unaware of how toxic those bonds were.

Although Burry would eventually be vindicated and handsomely rewarded for his bet, I personally think that the way he went about it wasn’t so smart. To be clear, I am not for one moment knocking his deep research and analysis. In fact, I applaud his diligence and ability to discover serious flaws in that corner of the market whilst everyone else it seemed was asleep at the wheel. Yet I don’t think it was a smart move for the following reasons. Firstly, his move to short those bonds represented a very high percentage of his total fund, which made a lot of investors very nervous. If you are a fund manager or work for a fund, it is quite common for an individual security to not represent more than 10% of the total fund. Anything higher than that percentage has the potential to create a lot more risk and volatility to the fund. What’s more, it was expensive to hold such a large short position as large payments to service it were due every month. It was understandable why those investors and others at his fund were nervous and had very little patience. Secondly, and more importantly, I don’t think Burry ever familiarised himself with Keynes’ quote. Although it took about two years for his bet to come good it could have taken much much longer. It is entirely plausible that had his fund had to wait even longer for his bet to come good there would have been so much pressure on Burry to finally close his short and thus cut the loses the fund was making by holding it.

You see it doesn’t matter whether Burry was fundamentally right in his analysis. He was completely correct. These bonds were a train wreck waiting to happen. But that’s not the point. The point is that timing the markets is very very difficult. Alternatively, Burry could have done the following. He could have still made his bet yet it wouldn’t have represented more than 10% of his total fund for example. That way, there would be less tension and pressure on Burry to close his position in the event that it was going to take so long to come good. What’s more, it would have still made him and the investors in his fund a lot of money when that day would eventually arrive.

This brings me to another well worn adage in the investment world of never having all your eggs in one basket. Although this may be a cliché it is so very true. Although enormous fortunes are made by putting all one’s huevos in one single basket, it is also the fastest way to blow up a portfolio. Burry’s enormous bet came good and he was rewarded, but he could also have been fooled by randomness by some unusual twist of fate.

Over the last few years many investors, including some well known names, lost a lot of money shorting Tesla. Although the rationale behind their decision to short the company was completely understandable, namely that the market capitalisation of the company was not reflective of it’s fundamentals, the share price has nonetheless continued to climb even higher. This right there should be a warning in the perils of going for that ‘big short’. As I already stated, it is ok if such a position is not so great that it poses a serious risk to an entire portfolio. But one can only imagine those legions of investors having a Michael Burry style moment with Elon Musk’s company.

Interestingly, it seems that Burry himself has now thrown his hat in the Tesla Short ring. I may be wrong, but it appears that his fund is betting against Tesla to the tune of 40% of the entire weighting of the fund. I wish him luck. Will his bet come good again? Or will he join the scores of other investors who got badly burnt betting against Elon?

By Nicholas Peart

10th August 2021

Image: thewrap.com

START-UPS: The Perils Of Growth At All Costs

Posted on June 20, 2021June 23, 2021 by Nicholas Peart

Start-ups are an important part of the business landscape. More crucially, the best start-ups provide much needed solutions to long standing problems. They provide real value to consumers. However, one thing I have observed over the years with certain start-ups is this mantra of ‘growth at all costs’.

If you are the founder of a start-up that provides a product or service that people really need and for a reasonable price, it is fair to say that this start-up has a bright future with a large potential for sizable growth over the coming months and years. That is all well. Yet, it does concern me when I observe the ones that have this ‘growth at all costs’ mindset.

No matter how driven or ambitious a founder may be, it is absolutely paramount that there is a healthy working environment amongst all the people who work at the company. There is currently a huge scandal with the UK craft beer company BrewDog over the maltreatment of many of its workers. BrewDog has been a huge success story. Ever since it’s founding a little over a decade ago, it has grown exponentially and is now the largest craft beer company in the country. It’s become a ubiquitous brand with it’s beers sold in all major supermarkets.

I could be wrong, but I am guessing that during those years when BrewDog was growing at such a fast pace, there was very much a ‘if you can’t stand the heat..’ atmosphere in the organisation. Even though BrewDog do make very good beers, the craft brewery industry is very competitive. There are many players and the way that BrewDog has been able to get to the position it is currently at today has been by scaling very fast in a relatively short period of time. By growing at such a rapid pace, it has now got to a size that gives it a clear edge over it’s competitors. If it had not embarked on this journey of aggressive growth it likely would have lost out to another competitor in the space.

Yet a big consequence of adopting an aggressive growth strategy is that it can create a toxic environment in the workplace. It suddenly becomes very easy for founders/chief executives to forget to care about the wellbeing of the other workers in the organisation as, in an almost single minded fashion, they have their eyes set on reaching their lofty targets they have set themselves out to achieve. They fail to understand that the workers are an integral part of the growth/success of their business. Without those workers, it is unlikely that their company would have been able to grow so spectacularly. This is especially true of those founders with very large egos and a lack of empathy for others.

A more extreme example of a growth at all costs business that makes Brewdog look like a plain vanilla enterprise is the rise and fall of office rental space company WeWork under the leadership of it’s colourful founder Adam Neumann. Unlike Brewdog, WeWork never made a profit and simply haemorrhaged cash. Billions of dollars of venture capital money was thrown at the company, most notably by Softbank whose founder and CEO, Masayoshi Son, really believed in the company. At one point WeWork had a valuation of over $40 billion. An eye watering valuation when one takes into account the fundamentals of the business.

WeWork also suffered from a toxic workplace culture. Those Brewdog workers, who via the Twitter group Punks With Purpose are bringing to light the less than perfect behind the scenes picture of the business, accuse the company of being ‘built on a cult of personality’. They take aim at how the company and it’s founders cultivated an image of the company as authentic (applying a ‘punk ethos’), caring about the environment, being forward thinking and progressive, and an amazing and cutting edge place to work at. Yet the irony is that it was anything but rosy. In their own words they scathingly say that “The true culture of Brewdog is and seemingly always has been, fear”.

Yet compared with WeWork this is small beer (no pun intended). The larger than life WeWork founder Adam Naumann would make make Brewdog co-founders James Watt and Martin Dickie blush. He took the term ‘cult of personality’ to another level. To the point where he was able to get some of the most powerful heavyweights in the venture capital space to invest megabucks in his business. Even though, with just a modicum of due diligence, it would soon seem apparent that WeWork was essentially a start-up with very poor fundamentals. The emperor had no clothes. Those VCs who were smart enough to see beyond the hype and mega personality of Neumann and actually did some stone cold research on the fundamentals of his business, saved themselves a packet.

Sometimes it is not necessary for a start-up to pursue a ‘growth on steroids’ strategy. It may be that you can create a lot of value and provide a unique solution without the need to aggressively grow. Sometimes large growth can happen by default if suddenly there is a massive demand for your products and services. And that is fine. There is nothing wrong with growth. Hell, there is nothing wrong with full on hyper growth. But not when it’s at all costs. Not when workers are not feeling valued and a dysfunctional and toxic workplace environment manifests.

By Nicholas Peart

June 20th 2021

Image: satyatiwari

One Golden Rule To Heed Before Investing In A High Risk Venture

Posted on June 10, 2020 by Nicholas Peart

Before you decide to invest in a company, start-up or venture that is highly risky, there is one very important rule that all investors should heed. We are all aware of the obvious rules such as doing sufficient due diligence and only investing what we can truly afford to lose. However, a less obvious rule, and the one which I am talking about in this article, is focused on having Skin In The Game.

The origin of this phrase is debatable although a quick Wikipedia search tells me that it originates from derby races whereby the owners of the horses taking part in these races have ‘skin’ in ‘the game’. More recently, it has been written about extensively in the works of Nassim Nicholas Taleb. Put simply, it refers to how much ‘skin’ a person has in something or how much personal risk they are willing to take on. For example, in the case of entrepreneurs or founders of businesses, an entrepreneur who has the vast majority of their net wealth tied up in their business has considerable Skin In The Game. Even though they will be handsomely rewarded if the company is successful, they will also go down with the ship and face financial ruin if the company goes belly up. This latter point is crucial.

When I analyse high risk ventures, one thing that is a huge red flag for me is a genuine absence of Skin In The Game. A founder or director of such a company needs to have the majority of their own capital invested. ‘Share options’ do not count. However, ‘director buys’ do.

Another red flag is when founders and directors draw huge salaries, especially if the company is not currently generating any revenues. If a company is not yet making money, a company will be raising money via debt or equity placings (issuing more shares) to keep it a going concern. This is precious cash and should not be eaten up in the form of generous remuneration packages. Alarm bells should be ringing if this is the case.

Founders and directors who have a considerable amount of Skin In The Game in a venture is an indication not only that they truly believe in what they are working on and executing, but also that they are motivated and kept under a considerable amount of pressure to ensure that the company succeeds. They believe in the company so much that they are more than willing to match their considerable belief via taking on a considerable amount of personal monetary risk. If the company doesn’t succeed they will be financially ruined. There will be no government or organisation ready to bail them out if they fail.

I have seen so many high risk ventures collapse where the founders and directors have come out of the wreckage mostly unharmed. They always drew big salaries and their equity stakes were mostly in the form of options rather than purchased with their own money. Founders and directors with little to no Skin In The Game are not under any acute pressure to contribute in the best ways they can. They don’t believe in the company they are working for nor is their heart really in it. It is merely a gravy train.

Thus, before deciding to invest in a company, start-up, venture or anything that is highly risky, one should always ask, ‘How much Skin In The Game do the founders and directors have?’

By Nicholas Peart

Image: valueresearchonline.com

THE FOLLY OF MARKET TIMING: Focusing On Percentages Not Prices

Posted on June 7, 2020 by Nicholas Peart

It is natural to get in the habit of trying to buy or sell shares at a particular price. Sometimes we may get lucky and reach our desired entry or exit point. Other times, we may not always get what we want in this respect. I fall into this trap myself a lot of the time, yet, perhaps unwittingly, am I playing a mugs game?

The future is uncertain. Nobody can predict the future and don’t believe anyone who tells you otherwise. I have written articles where I have talked about where I think certain things may be going, but the truth is anything can happen. I know nothing. Even if we have deep and unmatched levels of foresight we can so very easily, in the words of Nassim Nicholas Taleb, be fooled by randomness. We can be knocked off our perch by completely random and unforeseen events way out of our control. This is one reason why it is important to have a diversified and balanced investment portfolio. If one sector or stock is particularly badly hit by some unexpected event, at least your other investments in other stocks and sectors are not affected. That old chestnut of ‘not keeping all your eggs in one basket’, whilst it may sound hackneyed, still rings true.

Whilst we may or may not be able to get our desired buy or sell price for a particular stock, one thing we do have complete control over is how we weigh and structure our investment portfolios. There may be a company you highly rate and want to invest in, but you want to invest in it at the right price. Right now, you consider the current price too high and have lower price in mind that you hope will arrive. But what happens if that price never comes and instead the share price of the company just continues to climb in value? Instead of hoping to get the right price, or worse, the lowest price, why not say to yourself, ‘What percentage of my total investment portfolio do I want this company or security to represent?’. I think dealing in percentages rather than prices can not only help you to be a better investor, as it can take away a lot of the unnecessary stress and anxiety associated with trying to buy or sell a security at ‘the right price’. It can also help you overcome deeply ingrained cognitive biases.

When you focus more on what percentage of your investment portfolio you want a security to represent, rather than chasing a price, that can give you more control and balance. If the investment goes down in value, the percentage weighting it represents in your portfolio also goes down. If the investment goes up in value, it’s percentage weighting also goes up. By this you can then decide whether you want to be more overweight or underweight in the percentage weight of this particular security. If you want to be more overweight, you buy more. If you want to be more underweight, you sell a portion.

The percentage of what a security represents of your total portfolio is in many ways more important than the price you pay for it. Even if you end up overpaying for a stock or security, if it represents a percentage of your portfolio that is not too detrimental to the overall performance than it is not so bad.

By Nicholas Peart

Image: datanami.com

The Dangers Of Story Stock Investing

Posted on May 28, 2020May 28, 2020 by Nicholas Peart

Investing successfully requires a lot of boring fundamental analysis and often the best stocks to invest in are in boring overlooked, but undervalued companies with strong fundamentals and a decent margin of safety. These companies are not prone to hype.

On the other hand you have story stocks. Investing in a story stock does not mean that your investment will go down in value. On the contrary, a stock with a powerful story could make you very rich. Look at Amazon. Then again look at the multitude of other stocks, which had a powerful story behind them, but that was it. Fundamentally they were houses made of cards, which soon collapsed. The Dot.com crash from twenty years ago is littered with such casualties. More recently, the whole WeWork disaster is a prime example of company with an enticing and exciting story (as well as a charismatic and convincing leader), yet with very shaky and fragile financial fundamentals.

The problem with story stocks is that the stock valuation gets to a point where it is propped up much more by the goodwill of the story alone than by the company’s fundamentals. This is very treacherous territory as even a mild downtown or modest bit of bad news can send the share price crashing back down to Earth.

A stock with a unique story behind it is psychologically very alluring. Doing some solid due diligence such as analysing company reports and financial statements requires effort and if you dont have much experience on that front it can seem very daunting. However, with practice and learning you can become better at analysing and understanding all this nitty-gritty stuff, which also enables you to make better investment decisions with a cool head. Knowing exactly what you are investing in and having even just a modest understanding of the full financial health of a company is a very reassuring thing.

I suppose we prefer stories to analysis, because stories have much more of an instant cognitive resonance. Our minds can be lazy and it’s so much easier and more soothing to be swayed by a good story or glowing article in the media on a stock. More succinctly, sometimes a powerful mantra alone is enough to sway us. Software is eating the world or It’s the wave of the future or You are investing in a slice of history or Nobody else is doing what this company is doing are a handful of mantras that can make us overly bullish on a particular stock without questioning it further or taking it apart via some deep research.

The problem with such stories and mantras is that they activate and play to our emotions and making investment decisions based on emotions is never smart. We always have to have a healthy, balanced, critical and analytical mindset to investing without allowing our emotions to hijack and influence our decision making. A cool head always wins.

By Nicholas Peart

Image: 4.bp.blogspot.com