“Nothing so undermines your financial judgement as the sight of your neighbour getting rich.” – John Pierpont Morgan
Although it has been more than a century since Morgan’s words, little has changed about human nature. The main difference being that, in our digitally connected world, we have a lot more neighbours.
I’m seeing more of my “neighbours” apparently making fortunes. And increasing signs of impaired financial judgement as a result.
Granted, this is a bull market that is now more than eight years old. For most of that period, however, it has been a reluctant and nervous bull market.
The arguments between bulls and bears have been grounded in logic. The bears have argued that company earnings are unsustainably high and that multiples are well above long-term averages. The bulls countered that interest rates were lower than historical averages, likely to stay that way and that equities were relatively cheap as a result.
Both of those arguments have merit and you could have a well-considered reason for being on either side of the fence (or, in my case, sitting on top of it).
The back half of 2017, however, saw an increase in something more common in previous bull markets: mania. Crypto-currencies are the most obvious manifestation. Not since the 2000 tech bubble have I seen so many people talking about and speculating in something they know absolutely nothing about.
But it is becoming increasingly prevalent in the stock market too.
Get wary of GetSwift
ASX-listed GetSwift is a logistics software startup with a fully-diluted market capitalisation of roughly half a billion dollars.
Despite generating less than $1 million of revenue last year, a flurry of ASX announcements has investors excited.
In September GetSwift announced an “exclusive 5 year agreement with N.A. Williams” that, once up and running, is expected to generate $138m per annum of revenue. The only problem being that N.A. Williams doesn’t seem to be a company of any significance. Even Google doesn’t know much about it and the only financial information I could find suggested US$23m of revenue and 90 employees.
The ensuing months saw a flurry of other deals announced and then, in November, the big daddy of them all: “GetSwift is pleased to announce that it has signed a global master services agreement with Amazon.”
Even the bulls of yesteryear would have been sceptical. One can only assume this is the same Amazon that built the world’s most sophisticated cloud computing service because it couldn’t find an offering that met its requirements. The same Amazon that already offers same day delivery to more than 8,000 cities and towns. The same Amazon that spent US$21 billion on research and development in the past 12 months.
I will be very surprised if Amazon buys logistics software off anyone. Let alone an Australian minnow with less than $1m of revenue.
In the mania of late 2017, however, it is being lapped up. The GetSwift share price has rocketed from $0.25 at listing to $4.00 at the time of a recent capital raising. It was up 84% on the day of the Amazon announcement.
Picking on GetSwift is possibly unfair. It is but one of at least a dozen small companies I could have chosen. It is emblematic, however, of the frenzy that has taken hold at the speculative end of the market.
It’s lonely at both ends of the spectrum
I was in my early 20s when the original dot com bubble inflated then imploded. Lacking experience, I couldn’t fathom the stupidity of what people were doing at the time. How could anyone possibly slap a billion-dollar valuation on a business that doesn’t generate any revenue or even have customers?
This coming year I turn 40. Watching the same dynamic unfold, less than 20 years later, I’ve realised it’s not stupidity causing the problems. The rationale people put forward for participating in these frenzies is not investment logic. The reason they do it is because they are suffering from FOMO: fear of missing out. People see someone else apparently getting rich, and they want a piece of the action.
Most Forager investors have seen this sort of folly in the past, too, and are experienced enough to resist the urge.
That doesn’t make it easy. Just as the mental and emotional fortitude required to buy stocks gets harder the longer a bear market reigns, not participating gets harder the longer a manic bull market rages. It can get lonely feeling like you are the only person requiring profits and dividends to justify buying a stock.
Personally, I prefer the loneliness of a bear market. At least nobody wants to talk to me about it. The most painful thing of a manic bull market is all the new experts telling me I don’t know what I am doing. It could all come to an end in the next few weeks, but we should prepare for it to last much longer.
Prepare to be called a dinosaur, to be accused of not understanding that this time it is different and for periods of underperformance. There is every chance we are about to experience a real bull market.
This is an excerpt from our December 2017 quarterly report. If you would like to be added to the report distribution list, please sign up here.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.