This is Not the Way
Courtesy of Michael Batnick
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Meet Brandon Smith, the 32-year old who put everything he had in Tesla and became a millionaire.
I promise this will not be another post about valuation, but I do have to mention it one time. Look at the chart below from Research Affiliates. It compares the nine largest carmakers with Tesla. The other nine sold 121 times as many cars in 2020, yet all of them combined don’t stack up to Tesla’s market cap. In the words of Jacobim Mugatu, “I feel like I’m taking crazy pills.”
It feels like every day, I’m getting an email or a text from people outside the investing world asking me about speculative securities.
Listen, I understand how we got here. People are home with nothing to do. They got stimulus checks. Trading is free. The biggest winners are obvious. Zoom, Docusign, Peloton. All of the names that benefit from Covid. It’s easy.
These companies are putting up huge numbers, have healthy margins, are growing quickly, and benefit from network effects. And even if they’re not making money today, so what? With rates at 0, $1 of earnings 10 years from now is worth the same as $1 in earnings today. So believe me, I get it.
But this is madness. Making money in the stock market is not supposed to be easy.
And what’s the point in reading market history if you don’t learn from it? Any time the public acts like this, the market reminds them that there is no such thing as free money. Think 1929, 1969, and 1999. Reward is always interrupted with periods of gut-wrenching risk. That’s not different this time. That’s not different any time.
But, to quote myself, “The greatest lesson we can learn from history is that those who learn too much from it are doomed to draw parallels where none exist.” This is why we have to be careful with specific comparisons. In many ways, this is different than 1999. Sure there are pockets of excess, but these are real companies with real products and real revenue. We have to be open-minded to the fact that maybe this time is different.
Despite the insanity, I actually do believe the market is fairly efficient. In fact, I think this insanity is actually proof of its efficiency. You might think the prices are wrong, but if you’ve had this mindset for the last 5 years, you’re wrong.
Markets are efficient because nobody ever knows if prices are too high or too low in real-time. And real-time prices are all that matter. If you’re trying to profit off of this madness, then you’re better off going with the tide than fighting it. If you’re hell-bent on profiting off of a reversal, then you better get the timing right, to which I say good luck to you.
You might think you’re smarter than everyone else, but the market isn’t dumb. It doesn’t give away value. It’s usually more right than wrong.
So, how and when does this end?
A couple of months ago, I told the story of my plumber trading stocks. He said to me, “What should I do? I’ve got 130 grand in the market, and I have no freaking clue what I’m doing.” He actually said that. It would have been so easy to see that, dump everything I owned and shorted the market. But the joke would have been on me if I did that. Since then, his portfolio on an equal-weighted basis is up 35%. We could be nearing the end, or this could be just the beginning. Nobody knows what time it is. To paraphrase “Adam Smith,” We’re all staring at a clock wondering what time this thing ends, but the clock has no hands.
Look, I’m not looking to see people lose money. I don’t gain anything by that. I won’t be doing a victory lap if the worst comes to pass. But for anybody reading this who has turned $10,000 into $50,000 and thinks they’re going to turn that into $100,000, please read this book.
Making money is not supposed to be this easy. History is riddled with good times, but they don’t last forever. If you are sitting on stocks that have doubled or quadrupled, please be responsible. Have an exit plan if this thing turns, because you don’t want to be the last one out the door when the clock strikes midnight.
