Hype never works

October 4, 20196 Comments

Today, let’s look at the hyped up sectors that people bought into a year or two ago—seeing nothing but upside, all based on an investment “concept” or “theme”. Perhaps we can use the lessons of past hyped-up sectors to examine new or upcoming potential bubbles.

 

Bandwidth, baby!

The classic example of hype was the dot-com and internet craze of the late 1990’s. Everyone expected that the need for bandwidth and the growth of the internet would result in big profits for the players in the game. All those developing nations, including the massive population of China, were going to need the infrastructure to supply them as they too came online as internet users. True enough, the internet did change the world. But the corporations providing this infrasture didn’t benefit from the hopes and the hype. Instead, bandwidth became commoditized as more and more players got involved. Today, you get unlimited  Wi-Fi in your home and office for just a few bucks a month.  The dot-com era ended in a bust. The XLK Tech chart shows us the extend of the damage of this bubble.

 

Texas Tea

In the mid 2000’s, along came peak oil theory. You may remember how oil was supposed to go to $200 a barrel as the developed and developing worlds embraced modern industrial machines and automobiles. Like the internet, everyone everywhere would be using more and more oil. And after all, there’s only so much of the stuff in the ground. Oil went to almost $150/barrel. Energy stocks soared. Until they crashed.  Ultimately, the desire for oil created new exploration techniques, including shale, ocean and tar sand development. Oil, instead of becoming more scare as usage rose- became more abundant! Peak oil theory turned into peak supply reality. Game over. The WTIC chart above tells the story.

 

Bitcoin bashing

Two years ago, investors couldn’t get enough of Bitcoin. And why not? Paper money is going the way of the dodo bird. New forms of protected electronic currency are needed. Forget the USD. Heck, forget gold. Crypto-currency to the rescue. Perhaps this stuff will take off. But if and when it does, you can bet that –like the commoditization of bandwidth, and the oversupply of oil – the world of cryptocurrency will face supply/ demand pressure.  Just like any other industry. In fact, the hype seems to have peaked about a year ago for bitcoin- per the chart above. BTW–Bitcoin hasn’t been the worst of the hyped sectors yet – after all, it’s only down 56%. The tech bubble is still the champion.

 

Like, dude, this industry is gonna go sooooo high!

Finally – marijuana.  Whacky-tobacco as it used to be called. Not only does it make you high, It’s isolates can help fight pain, reduce swelling, and help you sleep. Manufactures are finding all kinds of fun ways to sell it to the public. Gummy worm, anyone? Again, here’s the problem…Everyone’s in on it. My friend sold his restaurant (best Shawarma you’ve ever tasted, and now it’s gone…to my regret!). He used the proceeds to partner up in a cannabis company. Meanwhile, back at the reality shop, I’m looking at a chart that shows clear signs of people putting the cart before the horse when projecting the upside in the industry. The largest ETF for the industry is MJ. And its down 55% since the hype peaked. Buyers of these stocks may need some cannabis gummies to help them sleep if this continues. Chart is above.

 

The lesson

Even if a “concept” or “theory” makes sense, that doesn’t mean you will earn long term profits on a sector. As we’ve seen, when something looks like a great opportunity, everyone jumps into the game. Tech companies pop up, and the industry becomes commoditized like in the 1999-2001 era. Oil is in low supply, so exploration methodology increases – thus supply increases. Bitcoin is the next currency, so everyone jumps on the opportunity, and then the market realizes its not quite ready for prime time just yet. The medical and recreational benefits of cannabis are now available in a legal, controlled manner – and everyone gets into the business- creating another supply problem.

Learn to think critically of any thematic based investment theme. Will Amazon truly take over the world of retail, or will there be competition that squashes its dominance? Will Netflix own the online entertainment space? Will Google always be the go-to search engine? Will Canada always control access to the banking industry? Will gold always be valuable or a go-to currency hedge? On and on…check your premises, as philosopher and logic promoter Ayn Rand once said. Make sure its logical, and you are not falling for the hype.

 

6 Comments

  • Hi Keith,
    Aecon seems to be trading at the bottom of a channel. Is this a good entry point going into fall?
    Thanks,
    Barry

    Reply
    • High risk/return trade. That stock swings 25% in a heartbeat, but it may be coming into one of those lows near the choppy trendline support level that can reward the investor with the risk tolerance.
      BTW–normally I never address individual stocks on this blog –but I was looking at ARE recently so it was fresh on my mind. I am on BNN on Monday at 6:00pm–which is the best place to pin me with individual stock questions (call in and say you read the blog!)

      Reply
  • Nothing better to do since it’s raining and I can’t go riding, so I checked to see how much one would have made in XLK if it had been held for a full 20 years. According to StockCharts, it has gained 136.27% for an average of 6.8% per year. $WTIC, not so much. It gained 120.75% over 20 years for an average of 6%. The S&P gained 125.15% for an average of 6.26%.
    No doubt had astute technical analysis been applied, the return would have been much higher. But it is interesting that XLK beat the broad market even with its more serious drawdowns.

    Reply
    • For sure Fred. But you need to pick a starting point. Tech has been the interruptive industry for the past 20 years and has been the best performer. But…If you had bought the SPX and energy (half your $ in each) in 2008, you are up about double for the SPX but down about half on energy. Hmmmmm….

      Reply
  • Timing is everything, jump in at the start.
    When your money doubles, take 1/2 in profits, i.e. get your initial money back … yah!!!
    When that 1/2 doubles, take 1/2 in profits again.
    Repeat over and over.
    When it drops 10%, done over finished! Sell whatever is less.

    But you must start early.
    A 10% loss will tell you it is over or you are too late to the party.

    Reply
    • You have a system. And as I have always said–a system will save you from yourself!!

      Reply

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