Proceed With Caution
Jul 08, 2020These markets sure feel greedy. It is difficult, even in these times of quarantine, to avoid being asked about buying stocks in bankrupt companies. The recent insanity in capital markets has captivated much of the financial world. Anecdotes of borderline degenerate gamblers up 100, 200, 300 percent in mere weeks by trading recent or upcoming bankruptcies can be heard far and wide. The wild swings and asinine valuations have not been lost on MAP’s investment team. It is a fun show to watch.
Frustrated financial professionals continue to shake their fists at Dave Portnoy, reddit’s WallStreetBets, the Fed, and Robinhood traders. We admit that it is at least mildly frustrating to watch friends gamble their stimulus checks on revenue-less companies and win. “What about the fundamentals!?” we implore.
Let’s take a step back. Events like this happen in financial markets. Bubbles, panics, and manias have occurred long before the NASDAQ. Asset prices have a human element to them. The foibles of crowds can lead to price swings that make no sense. The fundamentals are merely a guidepost. In the long run, asset prices will tend to that guidepost,but in the short run emotions can run hot or cold and asset prices thus run wild.
Recent swings have only been amplified by America’s newfound free time, with little to fill it. Sports and casino gamblers have turned to the stock market:
People who typically gamble on basketball took up betting on soon to be bankrupt shale drillers. This can drive certain stock prices to unsustainable levels. While there are no certainties in markets, a reliable rule of thumb is that when asset prices become euphorically detached from reality, it is helpful to avoid the asset.
We do not believe that Tesla is worth more than GM, Ford, Fiat Chrysler, VW, and Daimler combined. We do believe that the very elements that can value Tesla north of $250 billion are the same as those that provide opportunity to find attractive securities at discounts. Occasionally, a truck company that hasn’t yet sold a truck has a market cap of $25 billion. The flipside is that narratives surrounding high quality companies can become so negative that valuations depart from reality on the downside.
We should be thankful for those elements. As hard as it is to watch our neighbors open their first brokerage accounts in April and get rich on market excesses, we still believe the fundamentals will prevail. Bankrupt and unprofitable companies will eventually prove to be valued like bankrupt and unprofitable companies. Disciplined investors who stay the course and invest in solid fundamentals at attractive valuations will be the ones who come out on top. Be that disciplined investor.
It is ok to be frustrated that you are getting beaten by amateur speculators, but we think the more appropriate emotion should be amusement. Excess speculation will eventually snap back. Plan on being there to pick up companies that have become irrationally low. Embrace the ability of humankind to be irrational. It is the reason opportunities exist.
Managed Asset Portfolios Investment Team
Michael Dzialo, Karen Culver, Peter Swan, John Dalton, Zack Fellows
Research and analysis by Dustin Dieckmann
July 2020
The information contained herein does not represent a recommendation by us to buy or sell any security or securities mentioned within this presentation. Certain statements may be forward-looking statements and projections which describe our strategies, goals, outlook, expectations, or projections. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. Past performance is no guarantee of future results.
