Kingsmill's Investment Miscellanea: Friday, April 23 2021

Apr 23, 2021 | Joshua Kingsmill


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Key Takeaways

  • Are we in a “bubble” I’m always asked
  • At any point in time, there are invariably bubbles in some sectors of the market
  • Distinguishing between sectors that are in a Bubble and differentiating them from those that are not is they key

Are we in a “bubble”, I am often asked. It’s been my observation that in most times, there are invariably bubbles in some sectors. To me, the best definition of a bubble is that “if something can’t continue, it eventually won’t.”

By no means is this an exhaustive list, but over the last 20 plus years of my career, I’ve seen a lot of bubbles (and always been “right” that they will go down, but certainly never been good at timing this: bubbles can go on for a long time). Those fortunate enough and/or lucky enough who have the discipline and foresight to invest in things before a bubble, and sell before it pops have made a lot of money. (or look back in hindsight and wish they had).

Think of the early 2000’s and the Dot-Com bubble: gems like 360Networks, eToys and Webvan has astonishing valuations: worth billions of dollars, and no revenues. Of course that was a Bubble. It’s easy though to forget that during that time, some internet-based companies like Amazon, eBay, Google, etc. are all giants today.

There was a Junior Mining stock “bubble”: mining promoters could start Gold companies promising riches, everyone was “playing” the juniors: Think Bre-X. The lure of easy money, and the lure of the myth of the lone prospector striking it rich always seems to draw in investors. Out of this Bubble of thousands of “juniors” did emerge some world-class companies who made discoveries like Kirkland Lake and Osisko.

On-line gaming was a bubble. The Marijuana craze of a few years ago was a bubble, before the all-time “Highs” (ha-ha) came crashing time.

More recently, Cryptocurrency has people asking : “is this a bubble”. I believe, like the Bot-Com bubble of the early 2000s, there will be many significant companies that are created. But within the sector, there is certainly “Bubbles”. There is a cryptocurrency called Dogecoin. I can say with complete confidence that it is a bubble. It’s a joke. In fact, Dogecoin is for real a joke. It was created as a parody. (LINK). It was worth over $50 billion this week. Every serious person who mentions Dogecoin points this out.

But that isn’t proof that stocks or bonds or the market are hideously overpriced, and in a Bubble, or that there aren’t going to be some significant companies that emerge in the crypto sector. There is almost always wild excess in something, because that is the way markets work.

Part of the allure of public markets for a lot of people is that they harness the human desire to gamble, in order to provide liquidity. This means there is usually someone willing to buy or sell when long-term investors need to put more money to work or cash in. The unwanted side effect is that the gambling often sets the price, in the form of bubbles and stock momentum taking prices far away from the real value of the business.

In principle, none of this is a problem for those of us not betting the farm on a speculative booms. Well at least not too much: there is a risk-tolerance that is different for each person. And investing in speculative things isn’t inherently wrong: but just be mindful of the risk vs reward, and have a sell discipline.

So to go full circle, I don’t believe we are in a stock-bubble per se. Collectively—old-fashioned quality stocks—are reasonably well supported by the fundamentals of a stronger economy and low bond yields, even if they are at record highs. Of course, if those fundamentals worsen, as the global economic outlook has with the recent surge in Covid-19 in many countries, stocks should pull back. Historically there will be a few 5-10% pullbacks in a calendar year. That’s normal investing realties and challenges. Dogecoin though: is certainly not normal!

So I was going to conclude with a bit about the Academy Awards, which is televised this Sunday. But in all honesty, given the last year, I don’t know anyone who has seen any Movies. So I have no Oscar predictions (whose kidding who, my predictions would have been wrong anyways!). I do know though, that for any golf players out there, based in Ontario: this photo will resonate a lot:

Legality of Golf