This graph was all over internet recently:
One side of the story is that companies got ‘smarter’, understood that investors pay for growth and therefore re-invest every single dollar of cashflow into the business. The way that Amazon did. The other side is that investors think that every tech company is like Amazon and so far they are bragging their acumen because every money losing company went to the moon.
I briefly referred to the latest Howard Marks memo in my previous post. I found it really interesting, should say more than usual, because it made reflect…more than usual. In the various takes beaten down value (should I say non-Cathie, non-Robinhood?) investors wrote in the recent past, no one was able to express the qualities you need to possess to thrive in current market as clearly. Definitely not Jeremy Grantham. Here how I would categorize today’s traders/investors (the one that seems to make money):
- LV1: buy the hyped stock
- LV2: buy the stock because their current product/service is gas
- LV3: buy the stock because their future product/service is gas
- LV4: buy the stock because their current product/service (which is gas) is only a fraction of their future potential
- LV5: buy the stock for all the above reasons and hold on it during multiple 50, 60, 70% drawdowns.
I have never been part of any of the above categories. Not because I think there is anything fundamentally wrong in what they do, just because I never found the answer to the inevitable “ok, but then when are you supposed to sell?” question. To be more specific, how to quantify that answer. Value and Growth investors assign a value to a stock, buy at a price lower than that and sell once the price reached the target value. The value way simply resonated better with me and it was proved to be superior from an historical point of view.
Nothing in the past prevented some investors to make money with growth stocks and outperform a basket of value stocks. The bigger question is if the current outperformance of growth vs value is here to stay or will mean-revert like it did in the past. The growing importance of ‘intangibles’ in a company balance sheet made the value-investor job harder. But this is not the first time value investors had to change their approach; Buffett is not investing like Graham and Buffett+Munger are not investing like Buffett. Apple trading at a P/E of 10 in 2018 was a Value play. And below you can find a random sign that also ‘old’ companies are adapting.
But what is happening is some pockets of the market has anything to do with value or growth.
Valeant was a ‘hot’ stock some years ago. It was a pharma company that had a particular business plan: it was buying patents for drugs that were essential to cure a mortal / very bad disease and then increased their prices 10x. That strategy, combined with a good chunk of financial leverage, produced a seemingly invincible stock.
Until it was not.
Lot of people point at Valeant evil business plan as one of the obvious reasons why the company crashed and burned…but it had the same business plan on they way up. Why it took Hillary Clinton five years to write the tweet that marked the top? Most importantly, would you read it as the definitive sign that it was time to sell?
When too much is too much?
Tesla spent six years trading between $40 and $80, then suddenly was worth like the biggest car manufacturer, then like the biggest four, then like the entire sector. In one year. I am not saying that Tesla is like Valeant (their business plan is actually good in ethical terms), I think that Tesla entered in a phase similar to Valeant because its price going up represent the best (and only) explanation for its future price to be higher…until is not.
When any resemblance of a link to fundamentals is lost, then it is fair game for everyone. In five years we might talk about Tesla not as a car company but as a vehicle to bet on Elon ideas and its current valuation would make sense by then. Anything is possible. What it is improbable is that all the YOLO trades will be profitable for everyone who invested.
The GameStop saga is another example. If a company has 120% of its stocks shorted bad things can happen: those short sellers has to buy back those stocks eventually and since there are only 100% of those around, some people will be left with the hot potato in their hands (in reality, stocks available are less than 100%: the owner of GameStop is probably not interested in selling the company, index funds neither). There is nothing new here. Same thing happened to VW years ago:
In the bond market happens even more frequently, because the owner of a CDS needs the underlying bond if he wants to cash in its insurance, and usually the notional of CDS around is waaaaay bigger than the corresponding outstanding bonds.
But one thing is $GME as a short squeeze play, one thing is HODL $GME to the moon. On the 25th of January someone wrote this on the WSB board, which resumes pretty well the situation:
we can remain retards longer than they remain solvent
Sure, an hedge fund lost almost 3 billions but what about those guys that bought GME at $155? People that stick to one stock that goes up make news, stick to one that go to zero and you will also lose your friends because they will be annoyed by your story. No one will write about you losing 50k. It is your decision to not become rich, as the Bitcoin fanatics say, but it is as well not to become poorer.
What I am reading now:
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