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Sunday Reads

Speculating and making money on tech / growth stocks is soooo 2021.

In November 2020 I wrote: “This highly scientific and accurate visual below depicts what Value investors have felt like in recent years.” To Value investors’ delight, however, Growth investors are now seated in this death trap.

This was the worst week for U.S. indices since COVID-19 first eviscerated markets in March 2020 (FT).

For the NASDAQ in particular, this marked a brutal week in an increasingly brutal year. The technology heavy index has fallen 11.53% year-to-date on the prospect of higher interest rates and waning demand for pandemic darlings’ products. As we discussed a few weeks ago (Surprised by The Inevitable), this monster rally in technology and work-from-home stocks largely originated from an assumption that life would never be the same post-pandemic. Business travel would never return because now we have Zoom. No one would go back to gyms because now we have Pelotons. Streaming services like Netflix can keep adding more subscribers indefinitely because everyone will always be stuck at home in need of content, right? Woops!

Sentiment Check: Boom, Roasted.

There are countless examples from recent weeks demonstrating just how sharply sentiment has shifted away from exciting speculative and innovative assets. For those that watched The Office (US), it reminds me of the scene where Michael Scott goes around “roasting” each one of his employees, saying “Boom, roasted!” after each insult.

With that said, let’s get some updates on how some of the speculative assets that dominated headlines during the pandemic are faring:

  • Bitcoin: The cryptocurrency is down roughly 50% from it’s recent November high. Boom, roasted!
  • Cathie Wood & ARKK: The ARKK ETF returned 153% in 2020, and investors poured money into the fund. However, this year performance is so bad that there is an “anti-ARKK” ETF that shorts Cathie Wood’s flagship strategy, and it’s handedly outperforming. Boom, roasted!
  • MicroStrategy: In a December 3rd letter, the SEC told Bitcoin community hero Michael Saylor and his company, MicroStrategy, to chill out with the Bitcoin antics. The SEC stated “we object to your adjustment for bitcoin impairment charges in your non-GAAP measures. Please revise to remove this adjustment in future filings. Refer to Rule 100 of Regulation G.” Boom, roasted.
  • Netflix: The streaming service is representative of the broader issues that “work from home” stocks are experiencing as shares plunged 22% on Friday after reporting lower than expected subscriber growth for 2021. This was the company’s largest one-day decline since 2012. Boom, roasted!
  • Peloton: Things just keep getting worse for this pandemic darling. Shares of Peloton have fallen 83% over the last year, and the company is now being removed from the NASDAQ 100 on January 24th. The fact that it was only added on December 21, 2020 is symbolic of just how fast circumstances changed for companies linked to a “work from home” paradigm. Boom, roasted!

  • NASDAQ: The technology heavy index is now in correction territory. Boom, roasted!
  • SPACs: Perhaps nothing epitomizes the speculative craze during COVID-19 lockdowns more than SPACs. Yet, the fact is that the returns for most of these SPACs have been disappointing. The Wall Street Journal recently reported that investors are increasingly pulling their money out of SPACs before any deal has been completed. Boom, roasted!

Now I’m sure there are other headlines and stories that I’ve accidentally omitted, but you get the picture.

A Poisoned Chalice

It seems to me that the problems facing all of the assets covered above stem from their own success. In other words, they are the victims of their own success. The pandemic has been a poisoned chalice for many stocks as investors now expect companies that thrived from a work-from-home environment to continue generating similar results regardless of the extraordinary pandemic conditions.

For example, Peloton was the classic pandemic darling because it sells at-home fitness equipment at a time when everyone was forced to stay home. During lockdowns, sales soared. The problem, however, was that investors began setting these exceptional sales in unique circumstances as the new benchmark or baseline for future results. As expected, Peloton could not meet expectations as people started returning to gyms and the unique work from home environment driving Peloton’s sales faded.

Netflix felt the brunt of this poisoned chalice on Friday as shares fell 20% due to disappointing subscriber growth figures. Like Peloton, Netflix was poised to benefit from the pandemic as people are stuck at home in need of content to consume. Two years into the pandemic, however, most people that would subscriber to Netflix have probably done so by this point.

“Netflix posted its best subscriber growth ever in 2020, when billions of people were stuck at home. But the company has said that pulled from future growth and led to a slow start to 2021.(Bloomberg)

Bloomberg summarizes this issue perfectly. The problem for growth stocks is that their accelerated growth in this unique WFH environment has “pulled from future growth”. For investors, this inevitably means disappointment going forward unless baseline expectations are reset.

During the 19th century railway booms, for example, expectations of growth and demand became decoupled from reality. Leading up to the Panic of 1857, much of the speculation in land and railroads was tied to the expectation of settlers in a given territory. More settlers meant rising land prices, and meant that railways would be encouraged to run their lines through town, further increasing land prices. This was particularly true in Kansas:

“These new lines, with their aggressive land-purchasing policies and far-reaching plans for transcontinental expansion, provided the principal speculative opportunities for railroad investors of the 1850s. Their fortunes depended on a continuing inflow of settlers and the growth of commerce on the frontier, which required confidence in the viability of expansion westward.

In the spring of 1857 confidence abounded. The Cincinnati Enquirer reported “railroad fever”… According to Allen Nevins, a “fever of speculation in Kansas lands was raging, men selling homes, giving up well paid positions, and even borrowing money at ten percent to purchase farms.” Newspapers published along travel routes to Kansas in early 1857 described “a veritable torrent of humanity.” The lure of Kansas lands led some to expect Kansas to “increase by seventy thousand people that year.” In April settlers arrived at the rate of 1,000 per day.

The link between immigrant traffic and expectations of railroad profitability is visible in the responses to this great influx. As passengers to Kansas increased, the roads lowered rates for through traffic, indicating expectations of a lasting increase in the volume of business (and perhaps the railroads’ desire to encourage immigration to stimulate development).” (Calomiris)

Since the success of their speculations were largely contingent upon the growth of settlers, and that growth was significant, investors in Kansas began to extrapolate booming short-term growth into long-term assumptions. This is often where the problem arises. Just because settlers were arriving at a rate of 1,000 per day in April 1857, that does not mean there would always be 1,000 new settlers arriving daily. Just because Peloton sold a ridiculous amount of bikes during quarantine, that does not mean they would always sell that many bikes.

So What?

Flashy growth stocks and speculative assets are starting to lose their shine. The work-from-home trade that pushed stocks like Peloton higher is fading as companies inevitably struggle to maintain the extraordinary performance achieved during extraordinary times (COVID-19). This sentiment is visualized in the graph below, showing performance for the Direxion Work From Home ETF and Russell 1000 Value Index:

The increasingly negative sentiment for growth stocks is even important for investors not owning Netflix/Peloton/etc, as history shows that problems in one corner of the market can quickly spread. When a large company or institution falls from grace, investors tend to start scrutinizing their own investments more closely. There are countless historical examples of financial institutions collapsing during a speculative mania, causing investors to question how speculative their own investments might be and withdraw funds from other institutions. Bank runs ensue. The same logic holds for less extreme scenarios as well.

For instance, the recent underperformance of tech stocks has had knock-on effects in the private markets as startup valuations are being questioned and IPOs get delayed. The Wall Street Journal reported:

“Waning enthusiasm for tech stocks in the public markets is casting doubt on valuations in the private market, where prices last year hit stratospheric levels.

The public arenas have begun to dial down their fervor for high-growth tech stocks, with investors in particular punishing companies that don’t make money—startups in tech and biotech, blank-check companies and others still finding their feet. Venture investors, in turn, are rethinking how much they should pay in private deals…

Founders of later-stage companies are getting pushback on their hoped-for valuations from some growth funds that now use lower public-market metrics to assess them… Market conditions have [also] put a brake on public listings by some venture-backed companies.”

Maybe the events of recent weeks are just a blip, or maybe the unchallenged dominance of growth stocks and speculative assets is waning. Either way, this episode has offered a useful reminder that investing isn’t always as easy as just buying the hot new thing. Investors may be wise to start re-examining the recently ignored corners of the market. Now let’s dive into today’s Sunday Reads articles covering past speculative tech booms, their collapse, and more.


The Railway Mania of the 1860s and Financial Innovation

Why This is Relevant:

The railway manias of 19th century Britain and America offer a perfect example of how narratives can quickly turn negative in exciting technologies when something goes wrong. In this paper, the always excellent Dr. Andrew Odlyzko details the Railway Mania of the 1860s.


“The 1860s witnessed Britain’s third, and last, large railway mania. Although it added about as much mileage to the rail network as the great Railway Mania of the 1840s, little is known about it in modern literature. This paper documents how this mania managed to delude investors into pouring immense sums into the expansion of a public infrastructure. It did so by stealth, by introducing a variety of “financial innovations” reminiscent of those involved in the Global Financial Crisis of 2008. That period, just like ours, featured new technologies, novel business models, rapid globalization, dramatic increases in speed of information transmission, and proliferation of misinformation and disinformation. Combined with progressive relaxation of government regulation and extremely opaque accounts, the “financial engineering” of the 1860s misled even very knowledgeable and inquisitive observers, such as Walter Bagehot. The results included the Overend, Gurney crash of 1866, ruin to many individuals and businesses, and a large, but inefficient, expansion of the rail network. These in turn likely influenced the legal and institutional foundations of corporate capitalism. There are striking similarities to many aspects of modern financial markets that might be instructive, especially in the widespread reliance on “search for a greater fool” approaches.”

Visualizing History:

Notable Quote:

“although the economy has changed, there are common themes that do repeat. One clear lesson from the 1860s that arose in subsequent manias is the danger of combining “financial innovation” with opaque accounting, especially in complex systems. Another is that even very clever observers, such as Bagehot and Newmarch, sometimes fail to see the signs of dangerous instability, even when they search for them. And sometimes even very clever observers, such as Bagehot and Newmarch, fail to take into account some glaringly obvious information, such as that on volume of railway investment in their case.”


Riding the Bubble or Taken for a Ride? Investors in the British Bicycle Mania

Why This is Relevant:

The bicycle mania in late 19th century Britain was a wildly speculative affair, with 671 bicycle companies forming in just 2.5 years. This paper looks at the success (or lack thereof) of speculators caught up in this bubble.


“Clientele-based theories explaining asset price bubbles are often difficult to test because the identities of investors cannot easily be tracked over time. This paper tests these theories using a hand-collected sample of 12,000 investors during an asset price reversal in the shares of British bicycle companies between 1895 and 1900. We find that informed investors reduced their holdings substantially during the crash, suggesting that they were riding the bubble. Those who performed worst were not typically the least informed groups, but gentlemen living near a stock exchange, who had the most time, money, and opportunity to engage in speculation.”

Visualizing History:

Notable Quote:

“The investors left holding cycle shares that were almost worthless after 1897 were predominantly gentlemen based near a stock exchange who were active on secondary markets. Rather than being those with the least information or investment acuity, these were investors with the time, money, and opportunity to trade frequently during the mania.”

An Undertaking of Great Advantage, But Nobody to Know What It Is

Why This is Relevant:

Perhaps no “Golden Age of Fraud” is better known than the year 1720, when both the South Sea and Mississippi Company bubbles imploded. This paper looks at one of the most famous anecdotes from the South Sea Company debacle, which provides an excellent insight on the levels of speculation rampant in London at the time. The chart a bit further down shows that the amount of new startups being launched dramatically fell after the collapse of South Sea Company stock. This episode offers an example of how the failure of one stock can cause difficulties in other areas of the market.


While the the author of this article, Dr. Andrew Odlyzko, points out that the story is probably apocryphal, one of the most repeated stories of the South Sea Bubble was the promotion of a company that “lured investors into putting money into “an undertaking of great advantage, but nobody to know what it is’.” As Odlyzko notes, however, even if that specific anecdote is apocryphal there were equally ludicrous examples of investors blindly investing their money while chasing returns. For example, while the South Sea Company gets all of the focus for it’s dramatic rise, William Goetzmann and his co-authors demonstrate just how parabolic the returns in another exciting new industry were at the same time: Insurance firms.

As expected, the South Sea Bubble of 1720 offered a perfect example of how investors will herd into newly formed companies following the outsized success of a particular stock in the hopes that they will “hit the lottery” and experience a similar rally.

The ebullient atmosphere of 1719 offered new opportunities to promoters, and they began soliciting money from investors. Figure 1 [below] shows, in the scatter plot, the number of new projects announced each month, but multiplied by 10, so that the 88 projects of June 1720 correspond to 880 in the figure. These numbers are taken from William Scott’s The Constitution and Finance of English, Scottish and Irish Joint-stock Companies to 1720. As can be seen, out of the almost 200 projects that Scott tabulated, only 13 were started in 1719. But they were noticed by many observers. Also noticed was what seemed to many skeptics to be the inordinate credulity of the public that was eager to get involved. This led to the first of the events that likely inspired the ‘undertaking of great advantage, but nobody to know what it is’ fable.”

Visualizing History:

Notable Quote:

“Starting on Friday, December 18, 1719, the Daily Post carried for several days an ad for an ‘extraordinary scheme for a new insurance company to be proposed, (whereof publick notice will speedily be given in this paper),’ with ‘permits to subscribe’ offered for £0.05 each. No names of projectors, nor details of the scheme were cited.

The sale of the ‘permits’ took place on Thursday, December 24. Two days later, this same paper had an ad which offered refunds for the ‘several hundred’ of those permits that had been sold and explained that the whole thing was a hoax designed to show how easy it was to ‘impose upon a credulous multitude’.”



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