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A Tale of Two “Bull” Markets

Freaking Heck's picture




 

By: Mark Wallace at: http://capitalistexploits.at/

I recently had a conversation with a colleague wherein I told him that I was starting to look away from "tech startups" and instead at undervalued assets like natural resources, preferably in overlooked frontier markets.

The old axiom, sell when everyone else is buying and buy when everyone else is selling is more than just excellent advice. If you can muster the courage and discipline to actually do it you’ll end up very, very rich indeed.

The world hasn’t changed much in 6,000 or so years of recorded human history. OK, it’s changed a little, but the human psyche, the behaviour of crowds and our “instincts” have remained basically the same.

This is why bubbles form and pop. The human animal is actually very predictable.

From the Tulip Mania to the Bitcoin frenzy, it’s never different… ever. You have the same factors at play in every example throughout history.

I fear that what we are seeing now in the tech startup “industry” is following the same patterns that every bubble follows.

There’s no reason to lay out the chronology at this point. Everyone reading this likely understands how bubbles form and why. You’ll also likely know the inevitable outcome.

Chris talked about a Bull Market in PR on Tuesday. He gave some great examples of companies that were sold or acquired during the Dotcom heyday at mind-numbing valuations. How many of those are still around?

All bubbles contain the hallmark ingredient of “laziness”. Most folks don’t want to work hard. Most just want a shortcut to riches.

In the tech startup world this is presenting itself as a bunch of “investors” who believe that by throwing small bits of capital at a few hundred startups, they will stumble upon the next Facebook and be living la vida loca.

Jerry Neumann of Reaction Wheel recently posted an excellent article entitled, Betting on the Ponies: non-Unicorn Investing. The article talks about “picking” the right startups to invest in, or rather, why picking is really not that easy and you should stick to the things you know.

I know that patterns repeat. I know that the “startup trade” is really, really crowded. I know I want to be selling things everyone else is scrambling to buy.

Angel List has thousands and thousands of deals. New services and tools that help average investors identify, invest into and track the next “Facebook” are popping up like earthworms after a heavy rain. Every major city has several incubators, startup hubs and “innovation centres”.

Every month there is another billion dollar takeout. Every week there are dozens of 8-figure deals getting done, with companies and founders who really aren’t that impressive. These guys aren’t curing cancer, let’s be real.

Please don’t misunderstand me, I am not saying that the startup ecosystem is bad. On the contrary, it’s incredibly valuable and it WILL create massive change and enable us to continue to advance and improve our lot on this rock we call home.

But, it IS a bubble right now, there are no two ways about it.

I talked about ridiculously high valuations when I wrote about Why Dave McClure Could Ruin Your Startup. I hate to pick on Dave since as I said, I don’t even know the guy, but he is likely going to end up in the historically unenviable position of being the poster child for what went wrong with startup investing.

So what about those two bull markets?

Let’s contrast the incredible growth and popularity of anything and everything startup right now (I’m really talking mostly tech) to the completely bombed-out and un-loved natural resources sector.

I already discussed the former “bull” market. Meanwhile nobody wants to hear about the latter, the “real” assets. It’s not cool. Investors have lost billions and billions over the last few years. Firms like Renaissance Capital cannot fund their natural resources investments any further. Big industry players are blowing up as I write this.

Contrarian and vulture investors like Rick Rule are accumulating capital, building “wish lists” of companies to go after, and exercising incredible patience and diligence. Rick is going to get much richer in the not-too-distant future.

The guys loading their balance sheet with hundreds of startups, mostly focused on tech at valuations that assume NOTHING can possibly go wrong… well, I think history shows us how that is going to end.

Supply and demand will ultimately prevail. Right now the supply of everything “tech startup” is flush. The prices are dear and the sophistication of the average market participant is decreasing.

The “other” bull market meanwhile (resources) has been cleaned out. Supply is contracting as unfit players are eliminated. Prices have come down to below cash in many cases. The “unsophisticated” investors have been culled and now the professionals are picking through the carnage.

Where would you rather look? What would you rather be buying than selling?

I know how I’m answering those questions.

- Mark

 

“Tech is a bit ridiculous in terms of the deals being done… Startups with barely any profits are selling for sixty times expected forward earnings.” - Nouriel Roubini

 

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Fri, 07/11/2014 - 10:57 | 4947075 messymerry
messymerry's picture

[From the Tulip Mania to the Bitcoin frenzy, it’s never different… ever. You have the same factors at play in every example throughout history.]

I disagree.  In fact every cycle of humanity's dance through time is different.  The ups and downs take the form of a "driven oscillation", driven by the combined pressures of population and technology.  These two critical elements can best be described as taking the form of an exponential curve.  In the early stages, cyclic deviations are barely perceptable.  As we approach the penultimate collapse state, then the range of the cycles is monumental.  

Things are looking pretty monumental from my little perch on the ledge.

Fri, 07/11/2014 - 08:02 | 4946634 ChartreuseDog
ChartreuseDog's picture

I think 5,000 startups producing FaceBook games can all grow into billion dollar businesses.

Fri, 07/11/2014 - 02:14 | 4946411 litemine
litemine's picture

+ 1      I am 100% in agreement. The bubbles in stocks that are not productive or profitable are stocks: I stay away from.  I like Oil, Miners, Banks (CAN), Utilities and telecomunications. With a few Darts thrown at startup bio-health research ............reaching for cures....(these seem to get bushwacked by the "DEA"....I guess the congressional Pockets were not greased). All I can say is that the companies I hold, make or do something of  value....I think Facebook and Twitter can fall out of popularity as fast or faster than they climbed.

The stocks I hold most pay a dividend. In the 2008/2011 collape.....they still paid out each and every  quarter. Can't survive on that as an income yet, so I still buy more as money allows.

Fri, 07/11/2014 - 09:21 | 4946777 saveUSsavers
saveUSsavers's picture

A 3-4% dividend won't mean shit when you lose 30%. Dividend stocks are the first to be sold on margin calls. GL, you'll need it when this cracks.

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