Good morning,

Yesterday I wrote that news is dominated by short-term happenings in a complicated world where things change and new concerns pop up on a daily basis. News is also, by nature, very geographically centric. And foster this fear of missing out syndrome, known as FOMO.

All three issues are dangerous for investors. Let’s look at them one by one.

Short term thinking and new concern tend to accentuate the feeling that this time it’s different. The dangerous part of this axiom, is that it  lulls you into forgetting that certain things are non-negotiable for an investment to end in profits, namely that we don’t forget the fundamentals:  Sales, profits, competitive moat, financial strength and valuation do matter. How do measure a company without them?

Which bring me to what I call Idea Investing. These days, it seems that someone with a good idea is all that’s needed to attract interest and capital. And some of these ideas a very good. They address clearly a need or a future challenge. But without hard data, how do we value them? Take the electrification of things. Yes, cars, trucks, motorcycles and water crafts are going in that direction. But who will win the race? Established payers or start-up companies? That’s an important answer and potentially worth billions of dollars.

I wrote previously about Nikola, the second company named after Nikola Tesla. Like the first one (Tesla), it aims at producing electric cars, but unlike the first one, it was founded on lies and deception, which came to light after it had gone public. Yet, it’s still worth $ 5.8 billion USD, even though it doesn’t have a plant, a car or the technology. So yes, Tesla will most likely be there, but all the new car companies? Are you telling me GM, Volkswagen and Toyota are going to disappear? There are presently 70 electric cars startups*! There isn’t 30 car companies in world right now, and that’s including names like Ferrari and Aston Martin who are not powerhouses.

Which bring me to geographical centricity. Some of tomorrows winner are going up right now in your neighborhood. No doubt about it. But can we assume that some are going to come for afar?

In Quebec right now, we are excited by two entrant in this field of electric vehicles. Lion Electric in trucks and Taiga Motors in jet-skis. One or both may end up being a winner. But reading our newspapers makes it sound as if it’s a given. And it’s not. For instance, Amazon ordered 10 electric trucks from Lion and then later gave it an order for 2500 trucks by 2025. Which is impressive.

But left unmentioned by our local media was that Amazon ordered 100,000 electric trucks from Rivian. Is it possible that the Lion truck will end up better than the Rivian truck? It’s possible, but unless you’re a venture/early stage investor with a deep knowledge of battery technology and manufacturing in general, you can’t really make that prediction, can you? With little revenues, no profits and no financial disclosure given so far (remember that funding is not the same as balance sheet), how would you evaluate this venture? 

And please don’t mentioned the vehicle favored by many of the new companies to go public, the SPAC. How is this even legal, I don’t know? A SPAC is a fund created to go public and therefore raise money from investors (that’s you and I) with the following caveat. Give us your money and then we’ll find a private business which we don’t know anything about yet, we’ll convinced the owners to merge with us and then they’ll be a public company. In the meantime of course, we’ll pay ourselves 20% first. It’s basically a blank-check company sponsored by someone well known (being well known should be different than being trusted but hey …). 

In Taiga Motors case for instance, the SPAC is sponsored by Canaccord and went public in April 2019. The company said at the time it would focus its search for target businesses in the cannabis sector, but that it wouldn’t limit itself to a particular industry or geographic region. That’s a good thing, because jet-ski and cannabis don’t mix well together. But not to worry, because since the announcement that they were in talks with Taiga Motors (which I remind you is not a public company yet), the share price of this SPAC as gone through the roof. Why?

That brings me to my last issue for today. FOMO. Fear of missing out. When our neighbors, our children or our brother in law are all claiming spectacular investment results, it’s easy to get sidetracked from our plan. Never mind that none of this out performance is ever presented or audited. But they claim… Marijuana, Bitcoin, GameStop, Tesla… And somehow we fall into this trap. We’re going to miss out on this great opportunity to make a fast buck.

Take Bitcoin as an easy example. Firstly, let me say that I believe in the future of a crypto currency and the potential of blockchain technology, which underpins these crypto currencies. Crypto currencies because if you happen to live in a country with either  a corrupt central bank or a grave hyperinflation problem, having a neutral, widely accepted currency instead makes sense. For large swathe of the world, it would be useful. But a currency, to be serious, needs to be somewhat predictable. Sadly, looking at the following graph, Bitcoin is not. It is simply too volatile. So if it’s not a credible currency, how do you measure it ? You can’t.

And there is the problem. Legion of people have bought into this mania, but they couldn’t tell you the first thing about the value of a Bitcoin. Currency valuation is always hard to do, as demonstrated by the efforts people put into trying to establish what the USD will do versus the EURO for instance. But how on earth do you establish the Bitcoin value against the USD or the EURO or the… you name it? Yet, it’s uber-popular and you have new funds created just for the purpose of investing in them. Can you imagine a fund created to simply invest in CAD? Or USD?

What about Shopify. The following graph (sorry, not super easy to see) represents some of the most famous tech names since inception, so since they became public, on a price to sales ratio. We’ll use the P/S ratio rather than P/E ratio because some of them at some point didn’t have the E which stands for earnings.

So Amazon, Tesla, Microsoft, Facebook, Netflix and Apple. And in white, Shopify. It’s parabolically above every one of them. Don’t get me wrong. Shopify is a great tech company, but will it invent or reinvent new markets like Amazon, Facebook or Netflix have done? Asking the question is answering it at the same time. Most likely no.

But FOMO again. It’s the same with Tesla. The stock is down 30% in a month, but even then, it’s still wildly optimistic in its value. Look at those two charts (albeit slightly dated by a few weeks). There are lots of charts around comparing market cap of TSLA vs. other car manufacturers, but fewer look at the comparative revenue and actual car production.

All this to say, the old classics still work today. This time is not different than last time. Value remains an important concept before accepting any price. Diversification within reason will be your ally most of the time. Having a plan with realistic assumptions should underpin your portfolio. Furthermore, upon hearing a piece of news, ask yourself if it relevant for the next five to ten years or only for the next few weeks. It all comes back to the fact that price is what you pay but value is what you get.

Once again, thank you for your trust and your business. We appreciate both. And we remain open to helping your friends and family members who might enjoy our form of portfolio discipline, our no-nonsense approach and the importance we attached to client care.

Warmest regards, 

* According to energystartups.org