Is It Really Different This Time?
This week marks a year since pandemic lockdown altered our lives forever. To say it has been a strange year would be a gross understatement. It has been extraordinarily strange. Everything changed. Work, travel, living arrangements, simple trips to the store, doctor visits, movies, coffee shops, football games, baseball games, birthday parties, you name it, it changed. But we managed. We adapted. We changed. The lesson here for investors is a fundamental key to investing itself. Organic entities evolve. Organic entities seek to thrive regardless—or because of—their environment. They adapt. Let’s delve a little deeper into what has changed and explore the investment implications. Is it really different this time?
Two glaring examples of “what’s different this time” slap me in the face every week: meme stocks and bitcoin. It’s impossible to pay attention to the news and NOT be bombarded by stories about GameStop’s latest trading excesses or the unceasing rise and fall in the price of everybody’s favorite cryptocurrency, bitcoin.
How did GameStop become a thing? How did any of the meme stocks become a thing? The foundation for meme stocks was already in place before the pandemic lockdown. The website reddit.com has a subsection dedicated to investing with nearly 10 million users posting thousands of ideas, speculations, theories, stories, what-have-yous on a daily basis with the hope of creating a crowd effect around a stock. There are certainly other websites dedicated to investing and information sharing, but reddit is a convenient example that captures the effort and ability to drive herd (trader) behavior.
The trading app/platform RobinHood is the second critical piece to the meme-stock foundation. The app allows no-cost (to the user) trading for very small account sizes and the ability to purchase partial shares of otherwise out of reach stocks. Millions of new “investors” opened accounts and began day trading stocks. This combination of website-driven frenzy with distributed trading ability laid the groundwork for craziness.
The pandemic started the fire. Bored, stuck at home, out of work or underworked, young people turned their attention to get rich quick schemes via the reddit/RobinHood combination. Pandemic stimulus checks poured gasoline onto the fire. Much stimulus money funded trading accounts and will continue to do so. According to one survey, fully half of retail investors between the ages of 25 and 34 plan to place a sizeable portion of future stimulus checks into the market.
The result, as exemplified in GameStop, has been unprecedented share price swings in various meme stocks. Mob mentality rules the price swings with no regard to investment merit. Will this go on indefinitely? We’ve seen speculative bubbles before and they typically don’t end well. How long it goes on and how it ends is anybody’s guess. But for us, it’s not a game we play.
GameStop erupts again
Meme stocks are divorced from investment reality. Emotion, hysteria, and mob rule dictate their price movements. This is trading for entertainment value, not investing. Unfortunately, it creates a lot of noise and commotion in the market but we do our best to ignore it.
Cryptocurrencies, exemplified by bitcoin, are the other newfangled attention grabber at the moment.
Is bitcoin an investment? Let’s first ask a more fundamental question. Can bitcoin evolve? The answer here is, no, it can’t. Its structure is hard coded. When fully mined, there will be exactly 21,000,000 bitcoins in existence. No more, no less. The price of those 21 million bitcoins is entirely dependent on what other people will pay for them. Buying a “thing” in the hope that it is worth more in the future is the very definition of speculation. So far, bitcoin “investors” have been spectacularly right as the price has vaulted over $60,000. But does bitcoin create any value in and of itself? No. It can’t. All it can do is fluctuate in price based on what other people will pay for it. As a speculative vehicle, we wish bitcoin and its fans much success. For us, however, we’ll maintain our investment philosophy of seeking companies that create value in and of themselves. Organic entities that can evolve are our targets.
We’ve been in lockdown for a year, yet life has gone on and we’ve evolved and adapted, as have companies. Organic entities capable of evolution are the key to investing. Eddy currents churn up a lot of gunk and many short-lived species emerge and die out. We place meme stocks in this category. Further, inorganic entities like bitcoin are incapable of evolving and therefore are inherently unattractive as investments. Our portfolios are seeded with companies that we believe are capable and adept at managing change. Which really isn’t different this time.