What do the following three stories have in common?
- A video highlight of Lebron James dunking a basketball sold for $208,000 USD on NBA Top Shot (a new blockchain-based platform that allows fans to buy, sell and trade NBA-licensed GIFs of their favourite players). This is sort of a digital video version of the traditional sports card market where the NBA issues the cards and provides the digital marketplace. Notably, you can watch the same Lebron highlight for free at the following link on YouTube: https://www.youtube.com/watch?v=mdD3x8AbJTA
- In the middle of a global pandemic, and elevated unemployment levels, real estate prices have exploded across the United States and Canada. I could fill this whole article with similar anecdotes, but one of my favourites is that many Canadian homeowners made more money as a homeowner last year than they did working in their actual jobs. In a February article titled ‘Your House Makes More Than You Do’, Bank of Montreal Economist Sal Guatieri outlined the statistics around this phenomenon. For example, in 2020 the median family income in the Hamilton-Burlington real estate market southwest of Toronto was stable at $75K and the average house price rose by $154K (benchmark home price went from $633K to $787K).
- Depending on the day, Elon Musk is now the richest man in the world. The majority of his wealth has come from the unbelievable 700% run up in the share price of Tesla over the course of 2020. This dramatic increase for Tesla comes only a few years after the company flirted with bankruptcy in 2018.1 It also comes despite the fact that Tesla is still a boutique carmaker that only reported its first full-year profit in January 2021. As noted value investor Jeremy Grantham recently pointed out, Tesla’s market capitalization works out to a valuation of $1,250,000 for each car it sold in 2020. Meanwhile, General Motors, the biggest automaker in the United States, has a market capitalization that works out to $9,000 for each car it sold in 2020. I get that Tesla is more exciting and has better growth prospects than GM, but is it 139 times more valuable than GM?
In my mind, each of the above stories is a reaction to a world flooded with money in search of a home. Across the developed world, governments and central banks have responded to COVID-19 with an unprecedented amount of monetary and fiscal stimulus in an effort to prop up the economy during these challenging times. At the same time, interest rates have fallen further than ever before in response to central banks’ reactions to COVID-19. When I mentioned the mortgage rates currently available from major Canadian banks to a friend who just turned 65, he responded, “I have NEVER EVER seen 1.5%… but I have seen 17.5%.”
So what do people do when traditional fixed income investments like GICs have negative returns after inflation, and risk assets have done nothing but go up over the past decade? They move away from fixed income investments and towards assets further and further out on the risk spectrum. The three examples at the beginning of this article stood out to me, but they’re by no means the only examples of an investment market addicted to risk.
Note that I haven’t mentioned Gamestop or Bitcoin or the stratospheric valuations that some digital artists can now sell their artwork for. I also didn’t mention the fact that the most famous investor of all time just released his annual Letter to Shareholders and it barely even made headlines. Is Warren Buffet’s style of investing even relevant in a market where a tweet from Elon Musk can send stocks and cryptocurrencies flying in both directions?
I happen to think Buffet is still relevant, and I hope he lives to see the day where his style of investing comes back into favour. Perhaps more importantly, I worry about the lessons that a whole generation of investors are learning from the events of the past year, and to some extent, the events of the past decade. Investing isn’t supposed to be easy. You’re not going to be able to keep quintupling your money forever by investing in the tech start-up company your friend told you about. You’re also eventually going to run into a bear market that lasts longer than the four weeks it took for the stock market to bottom in 2020. For example, the Japanese Nikkei Index just hit 30,000 for the first time since 1990, and it remains below the all time peak of 38,915 it hit in late 1989. I’m not suggesting that we’re in for a 30-year reversal, but there is also no preordained universal law that states that risk assets can only go up in value.
As I write that last paragraph, I feel like the proverbial old man yelling from his porch for the teenagers to get off his lawn.2 I think that is because there is a part of me that has thoroughly enjoyed watching the market action of the past year. I’m 34 years old and have the time horizon and the good fortune to be able to take some risk in my portfolio. I have no interest in rolling the dice on something like Gamestop, but I have considered allocating a small portion of my portfolio to cryptocurrencies. I also think the concept of buying an NBA-licensed GIF of a favourite player and selling it later at a higher price sounds like a lot of fun. I mean it also sounds kind of crazy, but who am I to judge?
I guess the point I’m trying to make is that the market environment we’re living in right now can’t last forever, nor should it. There’s nothing inherently wrong with speculating on risky assets and earning spectacular profits from doing so, just so long as you understand what you’re doing, and you’re not risking money you can’t afford to lose. So have fun by all means, but just do it with a portion of your portfolio that if it were to hit zero, would not affect your day to day life. Also understand that “this too shall pass”, and at some point a Lebron GIF might be worth significantly less than $200K. In the meantime, stay off my lawn!
2 This must be how Jeremy Grantham from GMO feels every day.