Easy Come, Easy Go
Key Takeaways
Peloton is an exercise bike company which boomed during the COVID-19 lockdown. It rose from near obscurity to being valued at US$50B at one point. Currently, the stock is down -95% off its record.
Other thematic stocks are also down from their peaks: Moderna (-84%), Zoom (-88%), Etsy (-83%). Considering these companies are household names, it’s pretty terrifying to imagine such a severe wipe out over a short period of time.
It is difficult to maintain a long-term mindset as we get fed the latest news all around the world through devices in the palm of our hands. Today’s top performer can be tomorrow’s worst.
Broad diversification with emphasis on academically proven areas which drive long-term returns provides the best chance of investment success.
The #1 way to go broke is to open a restaurant.
— Dave Ramsey
Personal finance guru Dave Ramsey was quoted saying the phrase above during a show, where a caller asked for advice as her husband wanted to sell their fully paid-up home and use the proceeds to open a restaurant. He added that she was justifiably worried as he was going to take on a business venture which had the highest failure rate among all small businesses.
The low success rates of the restaurant business are unlikely to be just a US phenomenon. Local news recently reported in Aug 2024 that we were likely to see an acceleration in the closure of restaurants here.
Singapore’s fine-dining scene in dire straits; more closures expected before year end
— Business Times
Whilst the article above suggests that the closures were a result of consumers becoming cost-conscious and eating out less, there were likely a myriad of other reasons that contributed to closures e.g. high rental and costs, lack of adequately trained staff, and changing tastes.
However as advisors, we have seen that the number one way to go bust quickly is holding an un-diversified and concentrated investment, and believing you are right in doing so, and everyone else just isn’t seeing it.
Former Peloton CEO John Foley was interviewed recently where he shared about his stunning rise and fall from grace. Peloton was a company that made exercise bikes and boomed during the COVID-19 lockdown. It rose from near obscurity to being valued at US$50B at one point. In the hubris, Foley told his board that he believed that it would become a US$1TN company within 15 years. It is currently valued at US$1.6B and the stock is over -95% off its record since 2020.
In fact, not just Peloton, but it looks to be a losing proposition for a lot of the pandemic darlings over the past few years, especially if you had bought near their peaks. Imagine having your net worth collapse by over 90% over a period of 2 to 3 years.
In his interview, Foley was quoted saying “[Peloton shares] went from $170 to $2 … with that type of delta, I don’t trust the public markets to get the pricing right… [Peloton is] a $40 or $50 company, from my perspective today,” he said. (The current price is around $4.50) “The contract of the public markets getting a valuation right is broken.”
Are markets good at pricing right? This is where Nobel Laureate Eugene Fama, the proponent of efficient markets comes in.
Fama’s efficient markets theory has laid the groundwork for the multi-trillion dollar indexing investing universe and the rise of broadly diversified market trackers. The premise for investing in these vehicles is that stock market prices reflect all available information very quickly, thanks to the aggregation of all the buy and sell calls from millions of investors around the world trying to get a leg up on one another. As a result of their efforts, the stock market is, in practice, almost impossible to beat, and holding a diversified vehicle would be the best option for most investors.
However, Fama is no stranger to controversy, having gone head to head with another Nobel Laureate, Robert Shiller, who has criticised Fama’s work for minimising the role of investor psychology and emotion in financial markets.
In an interview with Financial Times correspondent Robin Wigglesworth, Fama noted that at the end of the day, his efficient market hypothesis was just “a model”. Like every theoretical model which cannot fully explain reality, it is likely to carry some errors somewhere — but for the vast majority of investors, it explains why even experienced individuals cannot outperform over a sustained long period.
We had written recently about how even stock markets 40 years ago were able to reflect breaking news nearly instantaneously, it is likely to be similar, if not better at adjusting to breaking events today. After all, if markets were not good at pricing and were inefficient, everyone should be able to make large amounts of money easily by buying low and selling high right?
As such, the key to investment success today lies in your ability to filter out the noise and stick to your investment plan over the long term. It is often hard to keep a long-term mindset these days with the speed at which we get fed the latest news through our mobile devices.
You may not believe that markets get the prices right all the time, but the prices are right often enough that it is very hard to act on “secret” or inside information. During periods where certain segments of the market rise due to “trends or themes”, or when you experience market weakness, thinking and acting for the long-term remains your highest probability of investment success.
That means, going back to your investment plan, reviewing your long term goals and reviewing whether any life changes necessitate a change in the risk and return structure of your portfolio.
For more information on how our process merges your goals into a long-term investment solution, come and have a chat with us.
