The Magic of Bubbles – But You Don’t Have a Wand

FredericMarsanne

Earlier this morning I was pouring a glass of milk and for some reason there were tons of bubbles in it. Well, not tons. It’s air after all! But that got me thinking…

There are so many types of bubbles. Come to think of it, they’re everywhere. The danger is we really hardly notice them. Do you dive? I’ll see the shark roaming around the delicious fresh meat that I am, not the multitude of bubbles in the water that are as many proofs that I am alive – yes, I am still breathing.

Liquid bubbles. Soap bubbles. Stellar-wind bubbles – yeah, in case you’re wondering, these are large cavities that a star's energy creates in the interstellar space. Bubble wrap. Champagne. Superbubbles. Mephedrone – it’s a synthetic stimulant – not that I ever tried. They’re everywhere. It’s an invasion!!!

And the list goes on. Dot.com bubble. The dot itself is a bubble sort of, isn’t it? Real-estate bubble. Tulip bubble. Chinese-equity bubble. Chinese-property bubble. When does it stop? 

Everywhere. Only I couldn’t see them until just about now for some reason. Finally, I am aware. It’s about time. And all of a sudden I realize how my life, our lives – yes, I’m talking about us, dear – is running on thin air…

So I rushed to that old masterpiece of a booklet by John Kenneth Galbraith, “A Short History of Financial Euphoria.” The book itself feels like a bubble somehow. So light you hardly feel you’ve read anything by the time you’re done indulging.  

110 pages. That’s it! Who does not have the time for such a jewel? I enjoyed it. It’s so entertaining! I can’t seem to remember the main point it’s nearly, how shall I say, elusive. It’s just too fun for its own good.

But make no mistake about it. It really weighs a ton. The book reviews the great speculative episodes of the past three centuries or so. They show common denominators. Galbraith comments, “This is of no slight practical importance; recognizing them, the sensible person or institution is or should be warned. And perhaps some will be. But (…) the chances are not great, for built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place.” Rings true, doesn’t it?

Fueling this euphoria, Galbraith continues, are two key devilish ingredients – first, financial amnesia or, as he put it, “the brevity of financial memory.” Financial collapses get forgotten fast. Come a new bubble a few decades or even years later, a youthful and self-confident generation hails the circumstances that create it as a breakthrough, which Galbraith also refer to as “a brilliantly innovative discovery.” The second is the widely held belief that the more money an individual is endowed with, the more intelligent he or she is. In short, the more moula, the more brains. If someone makes money buying this, they’re smart. My turn then to buy it…

Continues Galbraith, “Uniformly in all such events there is the thought that there is something new in the world. (…) In the 17^th century it was the arrival of the tulips in Western Europe (…) Later it was the seeming wonders of the joint-stock company (…)” Yesterday it was the Internet.

What will it be next? Biotechs with no revenue and no earnings? Drones are pretty light, aren’t they? Do they qualify as bubbles?

Take a company like Ambarella (AMBA). Fabulous firm. Great technology. Super-fast grower. Its system-on-a-chip designs HD video processing, image/audio processing and system functions onto a single chip, delivering gorgeous video and image. 

Ambarella flies high on drones. The notion of drones with high-definition cameras roaming the skies is a bit perplexing or mind-buggling, but clearly investors are taking flight on the idea big time. AMBA started to trade at around $6 in October 2012 and shares are now worth more than $120. It’s a 20-bagger!

Shall I buy and hope for another 20-bagger from here like so many frenzied folks? AMBArassing I even hesitate.

Remember, though. A great company does not necessarily make for a great investment if you overpay.

The magic of bubbles... Just don’t forget you investor may not have a wand!

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How Stocks Going Down Can Be Great News!

Frederic Marsanne

I know… Seeing your stock portfolio lose value is no fun. No fun at all. Who said there is anything to love about that? But one day it will happen. Yes, believe it or not, there will be another correction (defined as prices decreasing at least 10%) and another bear market (defined as prices going down at least 20%).

But a meltdown can be great news in many ways.

First, a stock market correction or a bear market bring valuation down and create true buy opportunities. Biogen (BIIB) lost more than 20% of its value on Friday, July 24. Chairman and director Stelios Papadpoulos, purchased 10,000 shares at an average price of $304.88 the following Monday. The Biogen big shot is also the Chairman of the Board of Directors of Exelixis, Inc. and Regulus Therapeutics, Inc., a member of the Board of Directors of BG Medicine, Inc. and the co-founder of Anadys Pharmaceuticals, Inc., which Hoffman-La Roche acquired in 2011. He retired as Vice Chairman of Cowen & Co., LLC, a financial services company, in 2006, after six years with the firm where, as an investment banker, he focused on the biotechnology and pharmaceutical sectors. (Source: www.biogen.com) The point is that he likely knows a good biotech investment when he sees one. Prices go down dramatically? If the asset has value, buy; don’t sell! As Warren Buffett put it, "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

Second, a correction or a bear market will test your mettle, and that’s a very good thing! Are you a real investor or just a trader or speculator? Think about it this way. The shares of Amazon (AMZN) and Netflix (NFLX) have gone through tremendous ups and downs over the years. Yet despite the huge fluctuations, all that you had to do is stay invested in their shares and you’d have created huge wealth for yourself. In 17+ years, one dollar invested in AMZN would have accrued well in excess of 300. But the shares did lose more than 90% of their value after the tech bubble imploded. To quote Warren Buffett again, “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.” It takes tremendous resolve and discipline, not to mention nerves of steel, to hold on to these shares, but if you do you’ll be rewarded. Do you have the b@lls, may we dare ask? LinkedIn (LNKD) recently collapsed. Did you sell or buy LNKD that day or shortly thereafter? Alibaba (BABA) is languishing after its IPO. Are you buying or selling? There is real satisfaction in showing courage and staying the course. Congratulations! You are getting rich. Just fasten your seatbelt!

Third, Investors should be aware that a market can’t keep going up forever; it needs to take breathers. If stocks keep rising, they may reach bubble territory. Once we’re in a bubble, the way down can be quite traumatic. The following bear market and reversion to the mean then have an end-of-the-world feel to them.  Crashes and crises can trigger recessions in their own right, disrupt economies and destabilize societies. Think 1929… Stocks go down? Enjoy! A healthy pullback is to be expected on the way to stardom and fortune. Even the implosion of bubbles eventually regenerates societies, economies and the process of wealth creation and (re)distribution. So be it.

Fourth, in the rare case you have invested in a losing stock (does it ever happen I wonder?), well selling it at a loss will reduce your taxable capital gains for the year and you won’t owe Uncle Sam and the IRS quite as much. Lucky you!

Fifth and lastly, experiencing firsthand the ferociousness of bear markets will try you, educate you and “better” you.  As Mark Twain put it, “A man who carries a cat by the tail learns something he can learn in no other way.” Corrections and bear markets produce, not only attractive valuations, but also the next generation of great investors.

The Great Depression had Benjamin Graham, Warren Buffett and Sir John Templeton. Will the next one have you?

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