Owners, Renters and Micro-bubbles

Recent months in the investment markets have shown some interesting trends.  The continued speculation of so-called meme stocks, like AMC and GameStop and the ongoing manipulation of crypto-currencies by a very small number of influential players are examples.  The idea behind crypto-currencies like bitcoin and ethereum is that they are not centralized like fiat currencies such as the US dollar or the euro.   However, when players like Elon Musk can affect their prices with as little effort as a tweet, I would argue that crypto has become very centralized, it’s just around one person as opposed to a government.  If you even consider them currencies.  We are also getting more questions from clients if we’re in a market bubble and is there the potential of a stock market crash.  There certainly have been more business reporters speculating that the market is in a bubble. 

For potential indications of a market crash, as opposed to a market correction, look no further then at corporate governance.  The chair of an audit committee plays an important role in making sure that management doesn’t give into temptation around “juicing” their stock price.  Coinbase (COIN) has two insiders on their audit committee which has all kinds of potential for financial shenanigans.  Palantir (PLTR) is taking shareholder money and investing tens of millions of dollars into a SPAC in exchange for that company signing a long-term contract with itself.  After 17 years in business, PLTR hasn’t grown its revenue organically and has never turned a profit.  This creates related party transactions which were everywhere in 1999.  Under Armour (UAA) got caught pulling revenues forward to prevent their stock from crashing.  Cheesecake Factory (CAKE) was caught inflating their numbers.  Look at the market manipulation of crypto by the aforementioned Musk.  Cute financial engineering can create a situation where when things get ugly, they get ugly fast.  Asset bubbles are also indicative of something systemic within that asset class, like interest rates and fixed income, over-valuation of stocks or plain over-exuberance in a part of the economy. 

While there are assets currently overvalued in our opinion, many companies are trading at historically fair values.  No investor can avoid crashes, however you can avoid undue pain by doing certain things.  Making sure that the due diligence into the companies you own is as complete as possible.  This leads to the fundamental question of investing, are you a renter or an owner?  An example of a rental type of investment in this context would be companies like Canadian Natural Resources (CNQ) and Suncor (SU).  These Canadian oil companies are arguably the best Canada has to offer for oil companies.  They’re well run and profitable.  But when you look at their 10 year performance (ex-dividends) the return has been very poor.  CNQ had a share price in June 2011 of $40.43/share and the price of this writing in June 2021 is $44.74/share.  This translates into a 10 year annualized return of 0.90%.  SU is worse.  In June 2011 its share price was $37.80/share and now its $30.27/share for a 10 year annualized return of -2.48%.  Compare this to Apple (AAPL) whose annualized return over the same time period is 27.85% and Costco (COST) of 19.67%.  The only way an investor made any money in CNQ or SU was to trade the stock (rent it) and hope your timing was excellent.  Crypto, meme stocks and flavours of the week discussed by your uncle over dinner should probably be considered rental investments.

Owners of investments (buy, hold and rebalance) have typically performed better than renters (day-trading, in-and-out trading) and quality has out-performed chasing short-term trends over time.  This brings us back to the question of “are we in a bubble”?  We don’t think so, but there are what looks like asset bubbles within the larger market.  Be cautions of real estate, but big tech has come off their all-time highs.  The Canadian dollar looks over-valued from a fundamental perspective but the USD is cheaper in comparison.  The bottom line is to own investments, rebalance as to not overexpose yourself if your timing is off and try not to rent.  You only end up making the landlord rich.

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