Bubble Fatigue
“People say that life is short, but it isn’t short. It’s very long.”
-Frank Abagnale
The battle cry of the modern speculator is “YOLO” meaning You Only Live Once. It is a kind of greedy twist on the “Carpe Diem” motto that Robin Williams invoked to motivate lackadaisical adolescent boys in Dead Poets Society. YOLO is obsessed with money—grab it all now before you die. People don’t yell “YOLO” when they give money to a charity or finish a challenging book. They could, but they don’t. They yell YOLO when they sink their annual bonus into cryptocurrency, or maybe when their broker approves a margin loan application. This greed is combined with a sort of nihilism—who cares if things don’t turn out how you’re hoping? In their view, living is doing outrageous things for a slim chance at a miraculous payday. I wonder what everybody will be yelling when it stops working?
The most unrealistic dreams center on the most ludicrous targets. Just over a year ago I wrote a piece titled A Bad Idea Bubble in which I laid out a number of examples where the market was attaching outrageous valuations to companies with questionable, even implausible, business models. I am sad to report that more than twelve months later very little has changed. If anything, speculators’ appetite for fantastical stories has gotten worse. Let’s check back on some of the stocks I highlighted a year ago.
Virgin Galactic (NYSE: SPCE) previously had a valuation of $6 billion based on the idea that people might someday pay to go hang out in outer space. There has not been very much actual progress on the space tourism front—these futuristic ideas take a long time. That’s what makes them futuristic. Investors have bid the stock up nonetheless, and the current valuation is $7.5 billion. That is down about 50% from its peak. Maybe there is a price too high to pay for nothing—or maybe the stock will rally and take out those old highs.
Carvana (NYSE: CVNA) has approximately tripled in price over the past year. The pandemic has played right into its hand as an online-only vendor. Sales growth has been about 36%. When I previously highlighted Carvana my specific complaint was that its valuation did not deserve to be similar to its strongest competitor, CarMax, which was much larger, reliably profitable, and gunning directly at Carvana’s niche of transacting completely online. Well, the two companies are no longer valued similarly. Carvana’s market capitalization is now more than twice as high as CarMax’s! CarMax is going to be a difficult opponent to crack long-term, but nobody is thinking about the long term, except in the most fantastically abstract way. The bulls think Carvana will become “The Amazon of Cars.” I am not sure what that means or why Amazon itself wouldn’t bother competing if the opportunity was really there. I guess you can pay any price for something you call the Amazon of its market.
Beyond Meat (NASDAQ: BYND) was my third example and maybe my favorite because its vegetable-based meat substitutes sound both unprofitable and downright unappetizing to me. I understand there is no accounting for taste, however, and apparently there is no accounting for popular stocks either because the market had rewarded Beyond Meat with a valuation of $8 billion. This stock has been the least successful of my three main examples, rising only about 10% over the past year. Sales growth has been 37%, while earnings and free cash flow remain consistently negative.
There are wilder examples of speculative money being thrown at unlikely targets. In fact, speculators seem to be running out of existing wild ideas and are starting to invent new ones. Non-fungible tokens (Google them) are a very trendy example, but something else even stranger will probably come along between the time I finish this piece and the time it arrives in your hands. It is hard to keep up with the craziness.
I suppose I could be wrong about any of these stocks, or cryptocurrency, or non-fungible tokens, but I will not change my opinion until the fundamentals (where there are any) change. Higher and higher prices do not prove anything.
Provident clients don’t need to worry about this foolishness. We have a few stocks that are near “full price,” but they are real businesses. An end to these fad stocks might even stoke demand for real business like the ones you own.
It is foolish to try to call the top of a bubble. Why use rational thinking to make predictions about an irrational phenomenon? These things simply have to play out in their own time. Yet I confess that I never would have thought this could go on as long as it has. Here is how I ended my previous piece:
Here in early 2020, the market’s worst elements seem to be bigger and more egregious than usual. They also seem to go up every single day. It won’t go on forever. We’ve seen this movie before.
Gosh, the bubble I am complaining about was not exactly newborn when I wrote about it a year ago, and by this point I am simply exhausted. There are about 250 trading days in a year, and that is a lot of waking up and wondering, “Is today the day these fads come crashing down?” then turning on the computer monitor and realizing, no, it’s not. In fact today will be a little crazier. Maybe tomorrow.
But that is life sometimes. The days pass slowly, and then you wonder where the years went. A lot of these YOLO speculators are probably plugged into the markets because it makes their day-to-day life feel more interesting. Someday they will all wake up and wonder where their money went. Then they will have to get down to the difficult business of real life, and they might have to do it poor.
I am reminded of the quote above by Frank Abagnale, the real-life conman played by Leonardo DiCaprio in Steven Spielberg’s Catch me if you Can. After a youth spent forging checks and chasing women, Abagnale has finally been caught and imprisoned. Now he has the rest of his life to regret the consequences of his impetuous “me now” youth. He says with sad recognition that consequences matter because life is long.
The history of financial markets is littered with these kinds of irrational spurts. Every generation digs new holes to throw its money into. Many years from now, looking back at the outrageous stock charts produced during this current bubble, people will smile and say, “Yup, that’s the stock market for you. Just keep your head when everybody else is losing theirs and you will do fine.” The opposite is true as well. Lose your head with everybody else…and you will lose your head.
There will be a few YOLO winners, but not many. Few speculators will get out while the getting is good. As the stewardess might say on one of the airplanes that Frank Abagnale famously commandeered during his conman youth, today’s speculators need to take a minute to locate the most convenient emergency exit, which may be behind you.
Miles G. Putnam, CFA