If the Wizard of Oz were written today about “Investing Crazes du Jour”, Dorothy’s famous repetitive line may well be: “Cryptos, SPACs and Robinhood/Reddit, Oh My!!”
As I begin my 36th year dispensing investment advice, I marvel at the consistency of human behavior. Specifically, the consistent avoidance of the knowledge provided by history, and the inability for many people to learn from their own mistakes, much less the mistakes of others.
Don’t get me wrong, I wasn’t immune to getting caught up in the emotions of the hot trade. Indeed, if memory serves, the first stock I ever bought – for myself – was down some 40% before I had even paid for the trade! In my early years, I tried many of the strategies that we often hear presented today as new ideas, but are actually old, repackaged ones.
As many of us have experienced personally, good judgment today, comes from the experience gained from misguided judgment in the past!
While gambling can be fun, exciting and occasionally provide immediate gratification, implementing a well-designed financial plan has none of those traits. Instead, it is deeply fulfilling. And life changing. Or, rather, “lives” changing.
Pennies from heaven? Well, not exactly, but at this moment in time, the world is awash in cash, with countries printing more every day. In the US, we have already seen record amounts of “stimulus” passed, with much more proposed. For some, cash is magically arriving in their bank accounts courtesy of government. That cash is but a brief visitor which can be seen in the rise of retail sales unaccompanied by job growth! Additionally, since having faith in something with a proven record of investment success is currently out of favor, loads of “cash” sits in the accounts of investors, institutions and corporations around the world. The alure of “something new” has led us to the current round of speculative “stories” like cryptocurrencies, SPACs, and more.
The older and more experienced I become, the more often the words of Ecclesiastes resonate in my head: “there is no new thing under the sun.” Of course, Ecclesiastes doesn’t mention crypto or SPACs but his understanding of human nature applies perfectly.
If I may digress momentarily, another favorite line from Ecclesiastes is “I know that there is nothing better for people than to be happy and to do good while they live.”
SPACs (Special Purpose Acquisition Companies) – Getting back to the matter at hand, SPACs have been all the rage lately with the gambling speculator crowd. Driven by rumors, these often leap in price right out of the gate based on no fundamental value at all. In the 1980’s and 1990’s, we called them “Blind Pools” and they are essentially the same thing. They are generally accompanied by compelling stories and often presented breathlessly as “sure things”.
Short selling. Short sellers are speculators who sell stock they have not, as of yet, purchased in hopes of purchasing the shares later at a lower price. Short Selling hasexisted in some form for hundreds of years. Short sellers are constantly researching companies whose stock price they believe to be overvalued. Indeed, most companies have some of their shares sold short by speculators at any given time. Occasionally, the short sellers overdo it and they get forced to repurchase the borrowed shares in a hurry, causing the stock’s price to rise in what’s known as a “short squeeze”. Unlike ownership of a stock, where the potential loss is limited to the cost of the purchase, the potential loss for a short seller is unlimited since the increase in the stock price is unlimited. The latest examples of this are the shares of GameStop and AMC Entertainment. Short sellers had sold these stocks short to a point where they were betting on disaster, which left them vulnerable to any good news that could cause people to want to buy the stocks. Some users of Reddit – a social media site – discovered the excessive short position and began to tout the purchase of the two stocks. This in turn caused the prices of these stocks to rise sharply as many of the short sellers had to repurchase the shares they had sold in an attempt to limit their losses. As a result, the prices of these stocks began to fluctuate wildly and violently. Then came the inevitable stories of the few who had struck it “rich” with these stocks, while the masses predictably jumped in after the shares were much, much more expensive. Professional short sellers seem uncannily right much of the time – indeed the analysts following these two stocks forecast them to drop by two-thirds, or more, in the coming 12 months. Makes for a great story with loads of excitement, but it’s still gambling, not to be confused with investing!
Cryptocurrency. The exciting new phenomenon than everyone is talking about and no one understands! Which brings us to cryptocurrencies like Bitcoin, and the latest, Dogecoin. Many articles have been written lately about the legitimizing of these because certain Wall St. firms are allowing the trading of the cryptocurrencies. Why wouldn’t they? Wall St. firms will mostly trade anything if they can make money on it. That fact, In my opinion, adds no legitimacy to the trade.
Bitcoin has a supposed limited supply and is generally used to effect untraceable transactions. Naturally, most of the transactions in Bitcoin are to either buy and sell Bitcoin or for illicit business. One is unable to use it to buy or sell nearly anything.
Dogecoin, which began as a parody, is even more problematic, as there is no limit to how much can be created, thus there can be no real “value” beyond the speculation.
It’s my opinion that these current currencies will end up worthless or nearly so. I could be wrong. But sovereign currencies issued by governments (or in the case of the Euro) a monetary union consortium of governments, are key to the implementation of monetary policy to control or stimulate economic growth and to diminish the impact of sovereign debt through currency devaluation. I can’t believe governments around the world will allow “Crypto” to flourish. Already India has issued a ban on all cryptocurrencies making it illegal to even own them. China and the UK, amongst others, are planning to roll out their own official digital currencies. A senior UK official recently warned that these cryptocurrencies will be worthless. Like the world wide web at its inception, the technology will stay with us and be transformative. But few of the early famous (infamous?) dot.com companies of the late 90’s are with us today. Likewise, the Blockchain technology utilized in cryptocurrencies may play a key role in the coming sovereign digital currencies. But I doubt any of the high-flying cryptocurrencies of today will survive.
The bottom line is that these ideas are fun to talk about, and may serve as a distraction or exciting gamble. But they have no place in a serious investment portfolio as they aren’t investments. They are speculative gambles. I’ll trade the excitement of a gamble for the peace of mind of a well-executed financial plan with a diversified long term portfolio at it’s core any day.
Don’t forget to turn off the news. Soon, maybe we can all take a much needed cruise!
Michael Rogan, Founder
Rogan & Associates