It’s a bubble! Or is it?

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In just the first trading week of the year, TSLA (Tesla’s ticker) is up almost 25%. This comes on the back of a 633% rise in 2020 and a 720-730% rise from it’s Mar 2020 lows. In other words, it has been insane. And this is even with a stock split of 5-to-1 that happened on 31 Aug 2020.

Other similar tech/growth stories have seen their stocks up many times over the last year. Take NIO, a Chinese EV company that’s also a darling of the EV and meme stocks community. The stock is up almost 1500% in the last year alone.

If you think I’m cherry picking examples, then let’s take a sectoral approach. In the past year, the ARK Invest ETFs, a bunch of actively managed ETFs that are essentially a bet on the industries of the future has turned its manager, Cathie Wood, into a celebrity. Just 5 years ago, she was managing $50m. According to this site, that portfolio is now worth $24b.

Plus, you have these mix of characters cheering these moonshot stories from the sidelines. On YouTube, I’ve seen plenty of channels of people who look like they have no business being in the investing business telling the skeptics how the skeptics don’t understand what the business behind what these ticker symbols represent – disruption, innovation, the future.

And the crazy thing is, right now, it seems like the markets believe these people.

Or perhaps, the markets are these people?

On the other hand

While tech and growth stocks have absolutely killed it over the last decade, Value has been decimated. Managers who look at fundamentals have been getting it wrong for many years now. Jim Chanos, known for short-sellers companies that he thinks are fraud, has been absolutely wrong on his Tesla shorts for some time now but of course, Chanos is a professional and his risk management is top-notch so his fund hasn’t been decimated by Tesla. You can hear his views on Tesla here.

Michael Burry, known for his short position on the housing market during the housing bubble, has also come out recently to publicly say that he has opened a short position on Tesla.

On a overall market valuation and psychology level, some seriously famous names are saying that things are getting out of hand. Namely, Charlie Munger in a recent interview, Carl Icahn in an interview and Jeremy Grantham in his letter.

The thing about these fund managers is that they’ve been around a long time. And I think that the current situation in the markets is a story that they’ve seen all too often before. bitcoin in 2017, 1999-2000, 2005-2007, the nifty 50, the Japanese bubble. If you dig through the history books, you’ll find the roaring 20s, the south sea bubble, tulip mania and many, many more.

So what gives? Are the boomers out of touch with the markets or will history rhyme?

What I See

To me, what I see is a classic disconnect between the people who understand innovation and the people who understand finance. The people who understand innovation are often optimists and believe that what they’re seeing is going to replace the technologies of old.

Electric Vehicles (EVs) are going to replace the Internal Combustion Engine (ICE) vehicles just like how ICE replaced the horse buggy/carriage; AI is going to replace the need for tedious coding scenarios and, with it, a bunch of fairly routine low-level jobs that is based on repetition. If there is a discernable pattern, the AI will sniff it out; the revolution in biotech and genomics also mean that instead of just living longer, we’ll live better lives as well.

Therein lies the innovators and optimists’ story – the removal of mundane tasks (like driving) and the (eventual) conquest of death and disease. When that is achieved, mankind will have reached utopia.

On the flip side, the finance people are realists. While they know that innovation and the progress of mankind is inevitable, this progress is prone to fit and starts. In the late 90s, the dot-com boom’s narrative was that the internet would change everything – from the way we shop to the way we live. Amazon would sell us not just books but everything that we could want or need. Other businesses also tapped into that narrative and sold that story to the investing public.

Thing about the above narrative is that the innovators weren’t wrong. Today, Amazon sells us everything. They’ve even gone beyond our imagination by offering 2-day shipping and other things that we could have never dreamed off in the year 2000.

The problem is that before Amazon made it to the current day, its share price crashed by 90% and remained well below the levels reached in 2000 for a decade. Furthermore, the reason why Amazon is doing well as a company today isn’t just because it’s a large online retailer, it’s mostly because of the fact that it’s a big player in the cloud computing space.

However, to get to where Amazon is today, it pretty much had to set the groundwork for decades. In 2000, the innovators weren’t wrong. They were just early. Meanwhile, the stories that they sold the investing public caused valuations to soar to levels too lofty. Just like Icarus trying to reach higher and higher, the high prices meant a lower margin of error. That also meant that once the credit cycle turned, many of these companies blew up. In short, they burned through cash faster than they could raise it.

Today, we’re definitely not seeing that. 2020 was a great year for IPOs. Furthermore, lots of liquidity remain on the sidelines. The FED hasn’t signalled that it will start pulling back on credit while a great number of SPACs remain waiting to invest in companies that show signs of promise. However, the SPACs won’t remain waiting for long. I suspect the modus operandi there is to strike while the iron is hot and by hot, I mean while the markets remain in a state of manic activity.

Where to next?

This post has gotten way too long. In the next part, I’ll share some more observations before I provide an opinion on what happens next.