Note from Senior Managing Editor Christina Grieves: Happy Friday, readers! Have you had the chance to watch the recent video update from Oxford Club CEO and Executive Publisher Julia Guth? If not, I highly recommend you take some time to watch it today.
In it, Julia is sharing what our recipe for success has been over the last three decades, including the factors that have led to our biggest winners of all time. She’s also sharing a new service, which she describes as “one of the most important developments in my 30 years at the Club.” Simply click here to watch.
People everywhere love stories.
They inform us. They entertain us.
We read them to our children. As adults, we devour novels, go to plays, and watch movies and television series.
It is largely through stories that we learn about the natural history of the planet, the founding of our nation, even who we are as a people.
But for investors, relying on stories – rather than cold, hard numbers – can be a fatal mistake.
A case in point…
A friend recently confessed that his portfolio had been decimated over the last couple years, despite the rip-roaring bull market.
“What happened?” I asked.
“First I took a beating in pot stocks,” he said. “Then I got clobbered in meme stocks. Now I’m getting killed in crypto.”
He found it astonishing that he’d lost so much money in three entirely different sectors.
He didn’t realize that he’d lost it all the same way: jumping on whatever was hot or – more to the point – buying into a story rather than relying on the numbers.
Consider pot stocks…
Millions of investors looked at the increasing legalization of marijuana for medical and recreational use, saw a fast-growing, multibillion-dollar market and – needing no further evidence of quality or profitability – plunged in.
However, marijuana, as you may have noticed, is a weed.
It’s easy to grow and – aside from its illegality in some places – the industry has few barriers to entry. That makes it tough to protect market share and profit margins.
Then there is the branding problem.
When a buyer of spirits walks into a liquor store, he doesn’t ask for bourbon. He buys Jim Beam or Jack Daniels or Wild Turkey.
Or if he’s looking for vodka, perhaps Absolut or Tito’s or Grey Goose. To consumers, these brand names represent quality and consistency.
Contrast that with the typical customer who walks into a dispensary.
He doesn’t generally request a brand. Rather he is told, “This one promotes a mellow high, while this one is a more active high. And this one helps you fall asleep.”
Yes, cannabis brands – like Trulieve, Curaleaf and Surterra Wellness – do exist. But they are not widely recognized by consumers, and their desirable qualities can be duplicated by competitors.
These are serious obstacles for investors.
The leading cannabis exchange-traded funds have lost half to two-thirds of their value over the last seven months.
The price destruction in many individual names has been considerably worse.
This is the risk of buying a story rather than relying on proven metrics like sales growth, earnings, profit margins and market share.
This year’s highly touted meme stocks are an even more flagrant example of buying into a story rather than sound fundamentals.
Millions of new traders – and not a few experienced traders who should have known better – bid struggling companies like GameStop (NYSE: GME), AMC Entertainment (NYSE: AMC) and BlackBerry (NYSE: BB) into the stratosphere beginning in January.
Social media users are creating a short squeeze, forcing investment pros on the short side to buy to cover and driving prices to the moon. Hold forever, sell never!
Early traders made a bold and fairly sophisticated bet. Late traders made one of the dumbest bets in market history.
While the market has hit more than 50 record highs in the weeks since, these stocks have lost around 40% to 60% of their value from their closing highs.
And given that their valuations are still absurd, more pain and suffering lie ahead.
As for cryptocurrencies, I’ve warned about this mania for months.
Digital currencies will ultimately replace fiat currencies and our antiquated banking system. As more countries (like El Salvador) adopt them as legal tender, more companies (like Microsoft) accept them as payment and more investors make them part of their asset allocation, future appreciation is practically guaranteed.
Bitcoin has lost a quarter of its value from its April high, although the decline has been fairly orderly so far.
At some point, crypto investors will feel like they stepped into an empty elevator shaft.
At The Oxford Club’s recent Private Wealth Seminar in Colorado Springs, I predicted that the coming meltdown in cryptocurrencies will exceed the dot-com bust, where the leading index of internet stocks plummeted 77% from its March 2000 high to its October 2002 low.
Of course, a few internet stocks – like Amazon (Nasdaq: AMZN) and eBay (Nasdaq: EBAY) – managed to survive and prosper.
Others – like Cisco Systems (Nasdaq: CSCO) and MicroStrategy (Nasdaq: MSTR) – are still well below their peaks from two decades ago.
Still others – like eToys and Pets.com – no longer exist.
Digital currencies are a genuine innovation, and a few winners – yet to be determined – will play a role in our financial future. I get that.
It’s the current market prices that are impossible to justify.
John Paulson – the investor who made a quick $20 billion in the mortgage meltdown during the financial crisis – calls crypto a “worthless” bubble.
He is even more bearish than me, calling crypto a “limited supply of nothing” that “will go to zero.”
Berkshire Hathaway Chairman Warren Buffett, perhaps the greatest financial genius of our era, doesn’t mince words either.
He calls Bitcoin “rat poison squared.”
Many crypto investors know this and truly don’t care. It’s not the numbers they care about. It’s the story.
This one will have a tragic ending.