Assets driven by emotion and momentum have seen their prices surge “to the moon”, as many Redditors and Robinhood traders like to describe the phenomenon. Perhaps you too might have been tempted to jump onto the bandwagon, purely because you think prices are going higher and there is this fear of missing out (FOMO).
There is no question that these theme-chasing, momentum or meme assets — they include stocks, special-purpose acquisition companies (SPACs), cryptocurrencies and non-fungible tokens (NFTs) — have had a remarkable run, much of it attributed to retail investors with time on their hands and stimulus money in their pockets. The frenzied trading was further enabled by zero-fee trading platforms and fuelled by social media.
Few, if any, bothered — or even pretended to bother — with underlying fundamentals and mundane metrics like valuations, profitability and balance sheets or, often, even business models. As we wrote before, many liken chasing these assets to a game — for instance, attempting to push the price of Dogecoin to US$1, as though the target price is a goal that, once achieved, will allow players to “win the game”.
We bet there are many “losers” now, people who got burnt in the ongoing selloff, especially novices who were late to the party. The riskiest of assets — including Bitcoin and richly valued stocks — are down sharply from their recent record-high levels. These assets have been a source of great concern — the elevated risks in what many see as growing bubbles and, critically, how their inevitable fall could impact the broader market.
Table 1 lists a dozen stocks with very high valuations — popular with retail investors — even after their steep share price corrections. Half of these companies are loss-making and one has zero sales. Table 2 shows the five largest cryptocurrencies, by value, in the world today (or at least at the point of writing).
Their rise was driven, primarily, by excessive liquidity and cheap (even free) money. Therefore, it makes sense that they are now bearing the brunt of the fear that liquidity and ultra-low interest rates are no longer “sure things”, as inflation rates tick higher.
Markets have a tendency to overshoot — both on the upside and downside — particularly when driven by emotion. But over the longer term, markets are generally efficient, and they will self-correct — as they are doing now. Indeed, this correction should allay worse fears of systemic risks — an imminent broader market crash, owing to excessive liquidity-induced speculations and irrational exuberance.
That said, it is inevitable that few will escape unscathed in the fallout. Table 3 comprises a dozen tech companies that also saw their share prices correcting lower — even though most reported robust, better-than-expected, 1Q2021 earnings results. Clearly, though, the magnitude of their decline is much smaller.
Share prices and valuations are all relative. And when the highly speculative and excessively priced assets fall, it will, to a certain extent, have a short-term drag effect on the rest of the market. There will be a negative wealth and leverage effect — traders will feel poorer and thus, less positive, while covering losses and/or closing out margin positions mean less money for other stocks. Since valuations are based on marginal change in prices, the overall net effect will be a broader risk-off sentiment and weakness in the whole market — even if the excessively priced cryptos and stocks constitute only a small share of the universe of investible assets. This is the opposite of how easy gains from these high-flying stocks spilled over into the market and pulled the rest of the market higher previously. We would not discount the possibility that this current scenario could still reverse yet again.
We think investors will still gravitate towards growth stocks — after recalibrating expectations to the likelihood that 2021 is the inflection point for inflation and interest rates — but we hope it will be towards those with higher-quality growth. Smart investors must be more discerning in picking winners even when they are correctly picking out longer-term secular trends and the sectors. For example, electric vehicles may be the future of cars but not all EV players will survive the competition. Investing involves a lot more than simply hoping someone else will be willing to pay a higher price.
The Global Portfolio closed 3.7% higher for the week ended May 26, with all but two stocks finishing in the green. The top gainers were Awanbiru Technology (+8.7%), Okta (+7.9%) and Geely Automobile Holdings (+7.7%). The two loss-making stocks were Johnson & Johnson (-0.6%) and Alibaba Group Holding (-0.2%). Last week’s gains boosted total portfolio returns to 56.6% since inception. We are still outperforming the MSCI World Net Return index, which is up 50.2% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
