Chasing Bubbles

bubbles

When you read financial blogs everyone wants to write about their best investment and the absurd amount of money that they made in a short period of time. Success stories are what make you popular. You become immortal and people look up to you like you’re an investment god. In this industry, reputation is all that matters.

I certainly had that ego when I first started picking stocks. I even had no fear of the market because I thought stocks had no where to go but up. I too chased quick gains because quite frankly, who wants to be a millionaire at age 50 when you’re wrinkly and stuck with a walker. I want to be rich now!

It’s no wonder that consumer investors are more likely to be emotional investors rather than fundamental ones. Everyone wants to get rich quick, but ultimately fail. How many times have I heard the phrase “but you can lose everything in stocks.” That’s only true because the experience of consumer investors is usually tied to chasing the “hot” stock. How many people got burned by Nortel? By Bre-X? Bubbles happen because we have the fear of missing out. The thinking becomes “if my friend is making so much money, why shouldn’t I be doing the same thing?

Chasing Waterfalls

I had my own escapade at chasing big gains. The reason was quite simple: Greed. When the value of something goes up quickly it is very easy to get caught up in the hype. At the same time you feel invincible because on a daily basis the value of your investment gains at astronomical rates. It feels like you’re on cloud nine and nothing can bring you down. It’s that type of arrogance that ultimately makes us terrible emotional investors.

Back when Chinese stocks were all the rage I had picked out a Chinese stock that I thought would be the next Agrium or Potash. During that investment period, agriculture, particularly fertilizer companies, were the hottest rage. I read many Internet articles proclaiming severe droughts causing famine in numerous countries necessitating the need for new techniques to grow food. The media said there was a lack of land to feed our population. The world was going to end unless these fertilizer companies sell more. I though there was no way agriculture stocks could fail.

To be honest, I know nothing about agriculture. I’m a techie. So why the heck was I buying stocks based on click bait articles that one finds on the Yahoo front page. Easy. Just take a look at the chart below for China Green Agriculture (CGA):

Screenshot from 2016-07-31 10:15:51

See that peak? It only took 3 months to get there. Buying the stock and holding it on the way up got you a greater high than any drug could give you. When you can double, triple or even quadruple your money in just a matter of months it’s like you won the lottery. Your ego gets the better of you. Just imagine walking around like Donald Trump and spewing random trash at people because they didn’t know to buy the stock but you did.

It’s all great until it isn’t. Generally bubbles pop as quickly as it rises when the fundamentals of the company don’t match the expectation. In the case for me, it was also shady accounting by the company that brought about its demise. Needless to say it was a lesson learned the hard way.

Popping Bubbles

If the chart above looks familiar to people, that’s because all bubbles follow the similar pattern above. Quick gains cause by hordes of investors rushing in to take advantage of unsustainable growth in share prices. The most famous stock bubble known to most Canadians is Nortel.

Screenshot from 2016-07-31 10:35:48

When stocks rise too fast with very little fundamental data to justify the price one should always be weary of jumping in. Usually the quick rise in price isn’t from increased profits or revenues. Consumer investors just get greedy and don’t want to miss out on exponential gains. This type of speculation is what leads most people to lose their shirts and then some. How many times have I heard people say stocks are risky because they have wiped out the savings of friends or family. That’s because they are gambling not investing.

It’s Never Different This Time

Bubbles form all the time. Yet people keep chasing after them thinking that it could be different this time. They keep investing with emotions rather than logical thinking and each time they come out angrier and angrier that the system was against them.

It certainly wasn’t any different this time around when news of Pokemon Go came out in North America. Check out what happened to Nintendo stock:

nintendo.png

I can remember everyone saying that Nintendo was the stock to buy because Pokemon Go was such a huge success. In a period of 4 days, euphoria took over and mounds of people poured money into the stock taking it up more 100%.

If there was any such thing as Black Friday shopping for a stock, this was it. The stock rose fast and people couldn’t wait to get their hands on it. Unfortunately for the average investor, they knew nothing about the game. Nothing about the product. Everyone associated Pokemon to Nintendo, but the real truth was that Nintendo didn’t even create the game. They only owned a tiny portion of it. On top of that, the game was free, and the in-game revenue couldn’t possibly justify the over $10 billion gain in market capital.

It’s no wonder that the bubble popped when it reached $38.25 and has now fallen over 30% off it’s peak. Without any positive results from Nintendo it won’t be a surprise to see it fall even further. The problem for most people is that they never learn their lesson and keep falling on their faces.

Learn Your Lesson

I learned about the Nortel bubble, but that didn’t stop me from investing in China Green Agriculture. Honestly, you really don’t learn your lesson until you’ve experienced it yourself. If you can’t learn from your mistakes and keep doing them again then perhaps you should have an advisor assist you instead.

When bubbles form it’s quite easy to get overly excited and think about large gains, but remember investing is a long term play. Follow some of these points:

  1. Never invest emotionally
  2. Avoid media hype when it comes to investing
  3. Don’t invest in things you don’t know anything about
  4. Stick to index investing

When you sit back and think a bit longer, you will soon realize how absurd investors are when they start chasing after bubbles. It might not pop immediately, but when the truth comes out it always inevitably ends bad.

 

 

 

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2 thoughts on “Chasing Bubbles

  1. Loved the post, I share your view of not being old and wrinkly when I accumulate my fortune. I only do index fund investing myself. I tend to follow funds that have a 10+ track record of earning 9+ returns. Right now I use healthcare, bio tech, large cap, and total stock market indexes. I don’t use them for retirement, I use them for financial goals in the 3-7 year realm; such as my $25k car purchase I plan to make in a few more yeas

    • I think many of us want to build wealth quickly, but chasing yield and capital gains isn’t a sustainable way to do so. A good balanced portfolio will probably yield roughly 6-7% in the long run. An ideal way to actually build wealth is to actually save more and save early. Let compounding do the work for you and reap the rewards later. It’s amazing how much more financial freedom you get if you save in your 20’s and a decade later you don’t feel the same financial stress other people do.

      For short term goals I actually don’t suggest investing in equities simply because of volatility. Even sector ETFs present a greater risk because of greater volatility. What was once a good sector to invest in can turn sour quickly, like oil and gas. I prefer total market indexes.

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