Always Bullish
“To make superior returns the investor has to be prepared to act against the consensus and invest when sentiment is extremely negative, or, as I prefer to call it, at the point of maximum pessimism. Likewise, he must be prepared to sell when the levels of optimism are excessive.” —Sir John Templeton
Stock markets had another good week, with the S&P 500 up 1.1% and the Nasdaq up 0.9%. The S&P 500 had closed at a record high for five straight trading days before a slight loss on Friday ended that streak.
Since we started this newsletter, we’ve spent much time discussing technology—and for good reason. During the last 25 years, technology has changed our lives. It’s been a key player in multiple booms and busts in the markets. And it’s seen some of the biggest individual stock market winners in the history of mankind.
Money flowed into the venture capital industry from professionals and amateurs alike to fund the next big thing. From innovative, capital-light business models, to the metaverse, to the blockchain, and now, artificial intelligence. There’s always optimism tied to a good story, and the companies are always bullish until the clock strikes midnight—when it comes time to prove one’s business can make a profit.
The book Engines That Move Markets, first published in the early 2000s, describes this cyclical process, which has plenty of relevance to what we’ve seen in markets during the last few years:
The path of technological development is influenced by a large number of factors, but a relatively small subset stand out. Success or failure depends upon not only the ultimate intrinsic viability of the technology itself, but the speed and cost of its development, its deployment, its access to funding and its protection from competitors. Historically the repeated requirement for cash injections means that the company always finds itself in a race to reach a point where a convincing case can be made before capital runs out.
There is a constant battle between perception and financial necessity. Any hint of failure will be self-fulfilling, in that it will immediately shut down access to capital. To survive, the company must always be bullish about its prospects of success. As capital markets are influenced by the general level of optimism, success is also affected by the prevailing economic and monetary conditions.
And the world’s bankers share the need to be optimistic for as long as possible. They want deal flow. They want clients that transact. And optimism tends to lead to more action than pessimism.
In the late 1990s, this led bankers, money managers, and some investors to go around the media and tout the merits of using ‘eyeballs’ or ‘price to eyeballs’ instead of profits and price-to-earnings ratios to value stocks. We now have at least one person at a big bank going on financial television not to discuss earnings multiples on stocks but, instead, to explain the ‘price to innovation’ multiple.
And yet, these innovative companies are laying off employees in increasing numbers. Maybe there is less business, fewer profits, or less innovation than they’d hoped. And, maybe the big run back up in many technology stocks during the last 13 months or so was a little too much?
“I don’t think anyone would disagree that it’s one thing to innovate and change the world and another thing entirely to make money. Business will be different in the future, meaning that not all of the old rules will hold. On the other hand, profits come from taking in more in revenue than you payout in expense, and I don’t think that’s going to change.” —Howard Marks (“bubble.com” — January 2, 2000)
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