I get it…it’s different this time. This market is an entirely different beast…neither bull nor bear.
In its quest to bound from one peak to another, it occasionally pauses for breath. Sometimes losing its footing…but springs back swiftly to recover lost ground.
We have been blessed with the holy grail of markets…one with unlimited upside and only minimal downside.
To experience this in your lifetime…can you believe your good fortune?
I thought I caught a glimpse of this phenomenon in 1987…but alas, it was a fake.
In 2000, oh, how we thought the new paradigm was the real deal…only to be left disappointed.
The years leading up to 2008…this was definitely it. Uninterrupted exponential growth was ours for the taking. Borrow to invest and ride the wave of never-ending prosperity to a wealth beyond your wildest dreams.
Well, that kind of happened. People with margin debt never, in their wildest dreams, thought they could lose all their money.
Don’t dwell on the past. That was then, not now.
If you weren’t there in the late 1990s, here’s a reminder (courtesy of Wikipedia) of what it was like (emphasis added):
‘At the height of the boom, it was possible for a promising dot-com company to become a public company via an IPO and raise a substantial amount of money even if it had never made a profit—or, in some cases, realized any material revenue.
‘Most dot-com companies incurred net operating losses as they spent heavily on advertising and promotions to harness network effects to build market share or mind share as fast as possible, using the mottos “get big fast” and “get large or get lost”.’
Sound vaguely familiar?
Here’s what Crunchbase News found when it ran the ruler over 12 venture capital-backed companies that went public in the second half of 2020:
Airbnb bleeds US$1.05 billion in red ink and the business is valued at US$111 billion. How is that possible?
Well, it’s different this time.
Airbnb and the others — courtesy of the Fed — will be able to tap the corporate debt market, forever and a day, to fund their loss-making enterprises.
Why would anyone think history is repeating itself?
With the Fed underwriting debt issues, why would anyone think history is repeating itself?
Those dotcom negatives were real negatives that could not be sustained. They deserved to be punished in a near-80% fall on the NASDAQ.
But today’s negatives are entirely different. Profits are so yesterday. Scale and growth are what matter.
Take the likes of Uber. Prior to its IPO in April 2019, Uber fessed up:
Source: ABC News
Two years later and true to its word, Uber accounts are still awash with red ink.
As reported by CNBC on 9 February 2021:
‘For all of 2020, Uber’s net losses amounted to $6.77 billion, around a 20% improvement from a staggering $8.51 billion loss in 2019.’
And what do investors get for being part of an entity that tore up US$6.77 billion in 2020?
Uber is currently valued at US$104 billion.
You’d think in this upside-down world of the greater the loss the greater the enterprise value, that Uber, losing six times the amount of Airbnb, would be valued somewhere north of US$500 billion.
But it would appear even the most starry-eyed of believers have their limits (on stupidity).
My disbelief in this whole ‘it’s different this time’ thing stems from being old-school.
Normally, when a company publicly states there’s a ‘snowball in hell’s chance’ of ever being profitable, the logical conclusion would be…the company is worthless.
However, there have been times in market history when logic is suspended. A fleeting period when the worthless is mistakenly viewed as a highly-prized asset.
Hmmm…non-fungible tokens suddenly come to mind.
Anyway, back to the boring stuff…market history.
We know the more famous episodes of investors being duped by the ‘it’s different this time’ myth were in 1929 and 2000…and call it a hunch, but possibly this time as well.
We know the dotcom bubble incubated its fair share of loss-making entities, but what about 1929?
In 1932, Robert Rhea authored The Dow Theory.
The introduction tells you all you need to know…this was a serious book about a serious topic for serious readers.
Source: University of Toronto
According to Investopedia:
‘The Dow theory is an approach to trading developed by Charles H. Dow who, with Edward Jones and Charles Bergstresser, founded Dow Jones & Company, Inc. and developed the Dow Jones Industrial Average (DJIA). Dow fleshed out the theory in a series of editorials in the Wall Street Journal, which he co-founded.’
In a nutshell, The Dow Theory is an old-school approach to value investing. The boring, logical stuff that keeps you grounded while others indulge in their ill-fated flights of fantasy.
In his 1932 book, Robert Rhea wrote about the period leading up to the 1929 crash (emphasis is mine):
‘Worthless equities were being sky-rocketed without regard for intrinsic worth or earning power. The whole country appeared insane on the subject of stock speculation. Veteran traders look back at those months and wonder how they could have become so inoculated with the “new era” views as to have been caught in the inevitable crash. Bankers whose good sense might have saved the situation, had speculators listened to them, were shouted down as deconstructionists, while other bankers, whose names will go down in history as “racketeers,” were praised as supermen.’
There is nothing different about this…
Well, what do you know…people were speculating in worthless companies back in the late 1920s.
Today’s obscene values being afforded to loss-making enterprises is nothing more than a repeat of previous periods of excess.
There is nothing different about this. It’s just man doing what man does…getting swept up in a rising tide of emotion.
Books like The Dow Theory are tiresome, unexciting and dreary. People want razzle-dazzle, not dull and dismal.
There is nothing new about this. Every generation of investors wants to believe they are special…they are different. But they’re not.
They fall for the same confidence tricks as their fathers and forefathers.
Is it just sheer coincidence the late 1920s, late 1990s and the present, register the three highest readings on multiples paid for (the average of the past 10 years of) earnings?
I think not.
However, in the current market, I accept mine is a minority opinion.
Faith in the holy grail of ‘unlimited upside with minimal downside’ is almost absolute.
No one can see how, why or when this market goes from being the holy grail to one hell of a fail.
But like all previous periods of belief in the market’s invincibility, it too will end in disbelief.
Editor, The Rum Rebellion
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