Tag Archives: speculating

SPACs, NFTs and another Tech-inspired Silly Season

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LowrieFinancial.com: TechDaily/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Is it just our imagination or has there been an uptick lately in exciting “new” trading tactics for seizing riches from exotic new markets?

After a year of sitting at home, an excitable generation of do-it-yourself traders has replaced traditional leisure-time activities with online pursuits: including aggressive, Tweet-worthy trading for fun and profit.

The result? Waves of volatile financial feeding frenzies and overnight sensations, egged on by a brood of freshly hatched social media stars and a spate of flashy new trading platforms with captivating names like Robinhood.

All this might seem new and different, if I hadn’t already seen such eerily similar circumstances so often before, with so many unhappy endings. I suppose that puts me in the same curmudgeonly camp as 97-year-old billionaire Charlie Munger (Warren Buffett’s long-time Berkshire Hathaway partner). He pulled no punches in this recent interview about Robinhood:

“[Some] may call it investing,” he said, “but that’s all bulls**t. It’s really just wild speculation, like casino gambling or racetrack betting. There’s a long history of destructive capitalism, these trading orgies whooped up by the people who profit from them.”

Speaking of Warren Buffett, a recent Financial Post article asked the question: “What would Warren Buffett make of this stock market silly season?”  The answer was that he already has weighed in on the matter many times before, including one of my favourite “Buffettisms”:

“The stock market is a device for transferring money from the impatient to the patient.”

Impatience in Action

But maybe this time is different after all? Let’s take a closer look. The current wave of “get rich quick” mentality launched in January 2021, when a Reddit-driven rally abruptly sent the prices of several unloved stocks like GameStop through the roof.

More recently, special purpose acquisition companies (SPACs) have captured a lot of attention. “When SPAC-Man Chamath Palihapitiya Speaks, Reddit and Wall Street Listen,” observed a recent Wall Street Journal column. “Amateur traders hang on [Palihapitiya’s] every word for clues about his next target: and for the insults he hurls at the high-finance elite.”

Non-fungible tokens (NFTs) have also been taking the trading world by storm. If you think of an NFT as being like a collectible — say, an autographed baseball card — but in digital format, you’re getting close to envisioning its worth. Similar to playing cards, people are collecting these pieces of code, typically exchanging them in cryptocurrency such as bitcoin.

How much can an NFT be worth if the collectible attached to it is in high demand?  However much the market decides.  In this recent extreme case, “NFT Mania” garnered $69 million for a piece of digital artwork.

Innovations vs. Investments

At least on paper, some have amassed rapid fortunes by trading into these sorts of innovations to catch a wave of risk-laden opportunity. But will these brave speculators manage to convert their good fortune into lasting wealth once today’s trends fizzle or fly? Continue Reading…

Investing is not a game

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LowrieFinancial/Unsplash: michal-parzuchowski

By Steve Lowrie, CFA

Special to the Financial Independence Hub

“You can’t invest without trading, but you can trade without investing. … [T]hinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other.” — Jason Zweig

Are you out of breath trying to keep up with the breaking news about GameStop and all the other red-hot trades o’ the day? Here’s a synopsis (to date), and what it means to you as an investor:

Seemingly Unstoppable Games

During the last week of January, a perfect storm of traders converged on the market, propelling the prices of a few previously sleepy stocks into the stratosphere.  Jason Zweig of The Wall Street Journal reported, “From Jan. 25 through Jan. 29, a ragtag army of individuals sent shares in GameStop Corp. up 500%, and sent many others skyrocketing too.”

Reddit Gone Wild

Interestingly, there was no huge, breaking news or major shift in these companies’ fundamentals to explain the surge.  Instead, a tidal wave of trading momentum happened to form on a Reddit forum called WallStreetBets.

Big Short-Sellers Get Squeezed

Whatever inspired the movement, it soon became a force of its own, like an online flash mob buying and holding shares at increasingly higher prices.  Why would anyone do this?  Many may have just gotten caught up in the excitement.

Short-selling involves borrowing a company’s shares from someone else, selling them, and then hoping the price goes down so you can buy them back at a lower price.  You then return the shares to the lender, while pocketing the difference.  If you pay more to buy the shares to settle your debt, you have lost money.  The risk of short-selling is that the maximum profit you can make is 100% (if the shorted stock goes to $0); however, the potential loss can be many times your original investment.  (Theoretically, your potential loss is unlimited if the share price keeps going up.)

If the price shoots upward, short-sellers can face margin calls, requiring them to cough up the difference between the original share value and the fast-soaring price.  Or worse, lenders can demand their borrowed shares back, forcing the short-seller to either find another borrower or buy back the shares in the open market at whatever price they can get.  In the case of GameStop, short-sellers like Melvin Capital Management lost billions of dollars meeting margin calls, which in turn became chum to the feeding frenzy.

Main Street vs Wall Street (David vs Goliath)

In typical fashion, the financial mainstream media has pitted this as some sort of epic battle between thousands of small, individual investors just trying to make a buck vs. the Wall Street/hedge fund fat cats backed up by some sort of rigged system.  Don’t kid yourself.  There were pros and sophisticated traders on both sides of this.  No novice is going to have the knowledge to orchestrate not only a short-squeeze, but an option-based gamma-squeeze on a heavily researched deep fundamental value stock.  At least not without a little help.

Robinhood Parries

As the frenzy continued, many U.S. retail trading platforms – including Robinhood, Schwab, TD Ameritrade, and others – started experiencing trading overloads.  Technical glitches, as well as deliberate trading restrictions, ensued.  Not surprisingly, traders impacted by the lapses and restrictions have cried foul, perhaps rightfully so.

Enter the Regulators

Is the phenomenon just a new, but a legal variation of a very old market mania theme?  Did anyone actually violate existing regulations, and if so, whom?  Are new regulations warranted?  Securities regulators are considering these questions, not yet resolved.

Now, to the main point.  Where does this leave YOU as an investor?

You may have noticed:   Continue Reading…

Investing ― not Speculating ― in Growth

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Image courtesy Franklin Templeton; iStock

By John P. Remmert, Franklin Global Growth Fund

(Sponsor Content)

 

Growth stocks attract a lot of attention, especially when momentum markets take share prices to heartpounding new heights. But as growth investors ourselves, we think many investors may be missing the point.

A single-minded focus on momentum is little more than speculation. If you want to invest in growth, rather than simply speculate, sustainable earnings are the key to unlocking value.

Stocks are the longest-duration assets in the capital markets. It may be several years until a stock’s value is fully realized, and as the COVID-19 pandemic has starkly reminded us, a lot can change in the meantime. We think it’s important to develop a mindset with a long time horizon and we seek to own the stocks of attractive companies that will benefit from the secular shifts that we think will shape the fortunes of businesses for many years to come.

Technology crosses all sectors

Technology is increasingly at the core of every business, not just those in the technology sector. If anything, the COVID-19 pandemic has simply sped up adoption of existing trends like ecommerce, machine learning and big data analytics. Health care, especially drug discovery, has surged forward with the rise of machine learning, like the biotech company we’ve owned for years that is now at the cutting edge of COVID-19 drug treatments with an antibody therapy that could help reduce symptoms in severely ill patients.

Within the information technology sector itself, we have invested in many US companies, as they tend to be global leaders with good corporate governance. But when we look at the pervasiveness of technology in other sectors, we find great opportunities in other countries and regions, like the South American stock we bought 10 years ago when ecommerce was non-existent; today the company is a market leader in ecommerce and has developed its own payment and shipping services to facilitate transactions.  Or the education company in China that was able to quickly move their business online when the pandemic hit, because they had been methodically investing in their online offering for years.

Supply chain links surprisingly strong

Although the pandemic and global trade tensions have put supply chains in the spotlight, in the long run, globalization still produces the best products at the cheapest price for the consumer. Continue Reading…