Originally published December 12, 2020
What is Exuberance?
Exuberance when your grandma calls you up to tell you about a new IPO (initial public offering) that she just bought. It’s when the number of YouTube financial channels starts to grow because enthusiastic investors keep making money on high-flying stock picks and think they are geniuses. It’s also when a new class of investors (Robinhood) enter the market and start buying “in fashion” stocks no matter the price.
Exuberance is what happened in 2000 before the great tech bubble burst… (see my personal note at the end). Now you see where I am going with this. It’s odd because there is also some serious fear in the market due to the expansion of the money supply across the globe, which is the result of government monetary policy to combat the economic/health emergency. This printing of money is unprecedented and could cause a financial catastrophe if not managed properly. These two forces are basically in a tug of war over the markets where depending on how you see things are either great (definitely expecting 20% per annum from this point on) versus the end of the world is near (expecting a long protracted bear market with little or no returns). It appears to me that the exuberant crowd is starting to take the lead.
Where is the Market Going?
I won’t lie, there are so many moving parts in the markets right now that the near future is not entirely clear. I have generally had a good sense of the future, but lately, it’s been much more difficult. I keep moving from bull to bear which means that for the moment there are no obvious strategies to play as there is a viable argument to be made for both sides. More recently I have noticed that IPOs like Airbnb are up 112% and Doordash is up 85% on their first day of trading. It could mean that the good times are here…increasing optimism yeah! However, to me, this is purely exuberance because people have stopped caring about the real value of stocks. Everyone wants to get rich quick and they are not so concerned about what they pay for stocks as long as prices are going up. The big banks are giving small investors what they want by creating a record number of new companies via IPO and now SPACs. It means that there is a lot of money demanding to be invested in the next big thing and as a result, billions of dollars are being absorbed into new company stock.
The stock market however is not unlike your local housing market. It ultimately has to abide by the laws of supply and demand. If you build too many houses, prices could stop rising or even fall, and company creation (IPOs) is exactly the same thing. Will supply just meet demand? Or will it be overshot and the market will fall? It’s hard to say at this point. Historically after a bear market, there are many years of economic expansion and good returns but as I have said in the past, this bear was a hybrid, mostly acting like a crash and not really a long protracted bear. Are we perhaps still at the end of the last bull run? Or is it a new day with many positive years ahead? No one really knows for sure.
I guess my point here is that the small investor should be careful not to get caught up in investing in speculative positions as it’s all the fashion right now. I have seen many small newish investors (not you guys) get caught up in the frenzy of buying large positions of Gold, IPOs, high-growth electric vehicle companies, and a myriad of other shoddy high-growth companies. They have also concentrated their portfolios with only growth stocks and have had little regard for sector balancing, diversification, valuations, etc.
Again, not to sound like a broken record, the best strategy for the moment is to keep a well-diversified portfolio that includes some hot stocks but also a bunch of solid boring stocks so that no matter what happens, you don’t get hit with a major downdraft of speculative stocks.
Following my Own Advice
Following the above advice, I added the Tractor Supply Company (TSCO) to the portfolio, a cool chain of stores that caters to country living folks – farmers, and pretend farmers “aka hobby farmers”. They sell all kinds of stuff like chicken coops, clothes, work gloves, garden tools, feed, etc. It’s not sexy, kind of boring, but it’s well run, has great financial metrics (my professional screener loves its financials), is a decent size, and weird. Weird is good because it adds to the diversification of any portfolio. It also fits well in my Consumer Discretionary section of the portfolio.
Measure Your Performance
Lastly, just a reminder that you should take note of your portfolio balances at the end of the month so that you can measure your annual performance. Comparing your results to an appropriate benchmark like the SP500 or the TSX composite is important because investing is a relative endeavor. If you are not achieving market-like returns then you have an opportunity to adjust your strategy or (if you chronically underperform) consider moving to a market ETF. Market ETFs are a boring way to guarantee getting market returns. There is actually nothing wrong with boring if they achieve your financial goals! Note that the small investor historically only achieves a 2-4% return vs the 9% of the market.
My Personal Story About Exuberance
Back in 1999 I got enthused with the market and set up one of my accounts with a balance of $20K (a lot of $ for me at the time). Because I was arrogant and overconfident, I leveraged these using options, meaning that a rise in stock was magnified maybe 2 to 3 times. In the beginning, it was like shooting fish in a barrel, the more money I made, the more I could bet. By 2000, I had about $125K in that account which is pretty good no matter what standard you use. I was feeling like a genius by then, and planning early retirement in my thirties (not kidding). As most of you know, history had a different plan. The bubble burst and any attempt to adjust i.e. buy the dip, switch to higher quality dot coms, only made things worse. After all the dust had settled, the account was valued almost exactly back to $20K.
I learned a lot from that experience, effectively that anything that can propel you up really fast can also propel you down even faster. Slow and steady is how the tortoise beats the hare and that is how investing should be managed in any market.
I am sure that some of you learned a thing or two at this time as well and likely remember how enticing exuberance can be.
Happy investing.
Marc’s Monthly Moves
| Buy | Sell |
| Tractor Supply Company (TSC) |
Marc’s Portfolio YTD Performance
- Portfolio return 22.1% (Including currency losses)
- Portfolio return 23.8% (without currency losses)
- SP 500 return 13.39%
Portfolio beat SP500 by 10.41 points.
Money with Marc 