Trends Investors Should be Sceptical About in 2018

Trends are a big deal in the investing world. Even if you aren’t going to pour over mounds of financial data sometimes trends are all you need to know about to successfully invest. Lots of people have beaten “experts” because they followed a trend rather than become intimate with the financial fundamentals.

It should be no surprise then that trends also dovetail nicely with investing hype and stock market bubbles. The trend is your friend only so long as it still makes sense. In fact being able to understand why the trend is occurring maybe the only thing that saves you from being an apocryphal lemming running over an apocryphal cliff.

In the movie The Big Short, Christian Bale’s character is shown to be a maverick who correctly bet against the housing market. But his bet, notably, was based on reviewing all the underlying mortgages that made up the mortgage backed securities and how the presence of sub-prime mortgages and rising borrowing rates tied to grace periods in the investments would lead to a housing collapse. There were a lot of people on the housing boom trend, but not many on the big short side. What separated them was knowledge about fundamentals.

Trends represent an essential aspect of investing that we typically discourage; betting on outcomes when the fundamentals are opaque or in dispute. Here are a few that we think investors should be wary of.

20160903_LDD001_0Self Driving Cars: In reality you aren’t likely to come across too many investments in this space. I’ve seen some through venture capitalists, but as a growing field and surrounded with lots of hype there is every reason to believe that firms will increasingly be looking for investors outside the venture capital space.

In principle self driving cars sound awesome and could radically change how we live and get around. Lots of companies are excited by the prospect of a self driving vehicles, including insurers and freight firms. However the entire enterprise depends on being able to eliminate the human component completely. That seems less likely and anything short of that (like having a driver always ready to take back control at a moment’s notice) will make the biggest benefits disappear. Beyond that there are also numerous other aspects that haven’t been considered. The cars will have to stop for all pedestrians, so what’s to stop pedestrians from just walking into traffic knowing that the cars will always stop? Or more terrifyingly, the potential for hacking cars and creating accidents with malware?

Those kinds of hurdles don’t get much attention in the fawning media coverage of self driving cars, but they represent the challenges that need to be comprehensively addressed before investors come to believe that this trend is safe and reliable.

Marijuana Stocks: I’ve written about the concerning hype regarding marijuana stocks before and haven’t had a reason to change my opinion since. One of the biggest reasons that investors should be excessively cautious regarding marijuana is because its still illegal. One of the lesser reasons is that as it transitions into a regulated drug, it will be more likely to be treated like cigarettes and alcohol.

In Ontario it has raised ire of prospective sellers that the LCBO would like have control over the sale of pot. In the United States, where marijuana is a Class A drug and regulated by the federal government, it was still unclear whether the federal government would get involved with states that had voted to legalize the drug. Yesterday the Attorney General, Jeff Sessions, announced that federal prosecutors will be allowed to decide how much energy to put into federal enforcement, rescinding the Obama era policy of staying out of the way of states the vote to legalize its sale.

2860534_1280x720This kind of regulatory uncertainty should give investors real pause when they consider which companies to invest in. Most marijuana growers have no profits and only debt and are betting on big returns once markets open up. They would not be the first companies to badly misread what the future holds.

Bitcoin: Whatever is attracting people to Bitcoin at this stage, most serious investors are keeping back. The common chatter is that no one is sure what is driving the price up except demand. Bitcoin is meant to be an alternate currency, one protected by the blockchain and whose algorithm should limit the physical number of total bitcoins in the world. While that may all be true, investors aren’t treating bitcoin that way. Instead prices have fluctuated violently, reaching peaks of $20,000 USD and falling sharply to $13,000 USD. Currently its trading at just over $14,717 USD.

CaptureCurrencies that are subject to incredible volatility are not normally appealing to investors. In fact stability is the key for most currencies, and the Bitcoin phenomena should not be an exception to this. Bitcoin’s intellectual champions point out that it is a versatile currency and a store of value, but if you were a retailer how would you feel accepting payment from a currency that can drop 30% in one day? As a consumer it also would trouble you to pay $5 worth of bitcoins one day only to find out it was worth 1000% more a month later. Currencies work because people will readily part with it for other goods confident that the value is roughly consistent over time.

Bitcoin, and by extension other crypto-currencies lack this basic property, and instead operate in an expensive, unregulated market with little oversight. Investors should give extensive thought as to whether Bitcoin represents good value for money.

As 2018 unfolds, no doubt there will be more ideas that will seem credible but may have little to offer investors except brief excitement. Scepticism remains an investors best accomplice when assessing excitement and investment hype.

Be the Most Interesting Person at Christmas Dinner

Merry Christmas and Happy Holidays! We’ve been busy over here for the last couple of weeks and unfortunately I haven’t been able to update our blog as often as I would like. However lots of interesting and important things have been happening over the past two weeks and they are worth mentioning. Check them out below!

Bitcoin is maybe not going to survive. Maybe: There is an ongoing fight about whether Bitcoin, the digital currency, is in fact a real currency. Bitcoin has been criticized for being a tool of the criminal underworld, and praised for its inventiveness. But like all fiat currencies there is a lot of speculation about whether it is worth anything. After all, who is backing Bitcoin? There is no government that will guarantee it and not every government is happy with it, and its value fluctuates wildly. And yet Bitcoin persists, at least until today. China has just banned Bitcoin and its largest exchange will not accept any more deposits, sending the value of Bitcoin tumbling.

What’s good for the investor maybe bad for the economy: There is a demographic shift going on in the Western Developed nations. People are getting older. Not just older, but retirement older, and as a result the economy is feeling pressured to respond to needs arising out of this aging baby boomer trend. One of those shifts is towards dividends. Dividends are traditionally issued by companies to their shareholders when the companies have extra money lying around and can’t use it productively. However many companies, especially large ones that generate more cash flow than they can reasonably use issue regular dividends, such as banks and many utilities. This is useful to investors that are looking to retire or are retired already. Regular dividends help provide retirees with regular and predictable income. However dividends may be bad for the economy. CEOs are often rewarded for market performance, and markets tend to like companies that increase their dividends (Microsoft increased its dividend in September). But companies can be far more useful to the economy generally when they invest in growth rather than give money back to shareholders. That would mean hiring new people, building new factories and generally moving money through the economy. But as much of the population ages and looks for dividends this might undermine the both growth in economic terms and affect choices that CEOs make about the future of their companies.

Canadians are at record debt levels, again: This may not come as much of a surprise, but Canadians have record debt levels and nothing seems to be correcting it! This story began regularly occurring in 20102011, 2012, and of course 2013. What is more important about how high the debt of Canadians continues to rise, but what’s driving it. Not surprisingly it’s mortgages. The high cost of Canadian housing has worried the federal government, and many global organizations. But far worse would be a deflationary cycle on Canadian homes, driving down the price while saddling home owners with debts far in excess the value of their houses. Despite a number of efforts to limit the amounts that Canadians are borrowing, the very low interest rate set by the Bank of Canada is keeping Canadian’s interested in buying ever more expensive homes. The reality is that no one is really sure what is to be done, or what the potential fallout might be. What is clear is that this can’t continue forever.

We’re going to be taking next week off, but will be back in January!