Whether it be marijuana or bitcoin, you don’t need to be invested in the most talked-about sectors to still make very good long-term returns.
Some of you may be young enough to not have experienced the craziness that was the internet boom of the late nineties. It was one for the ages. The internet was going to change the world. (And in many ways, it did.) Profits no longer mattered. It was all about price to eyeball ratios and who could make the most expensive superbowl ads. In the rush to cash in on this once-in-a-lifetime opportunity, investors abandoned all their traditional investing yardsticks. As one friend put it, when I tried to argue that it was all a bubble in search of a pin, “bubble schmubble.” It’s hard to argue with bubble schmubble.
Of course, in retrospect we know that this did not end well. But at the time, it seemed like internet stocks were the way of the future. If you weren’t invested in the latest dot-com poster child, you were missing out on an incredible opportunity.
When the bubble burst, I thought that the mania had passed and that investors would come to their senses again. I figured it would finally be back to investing as usual. What I didn’t realize at the time was that investing as usual means there is almost always some shiny new object ready to commandeer investor’s attention and hard-earned money.
Over 21 years, I’ve seen a lot of investing fads come and go. After the dot-com bubble burst, we had a pause for breath in the early 2000’s. Then the mining sector took off, driven by China’s insatiable demand for raw materials. Especially in Canada, penny mining stocks were all anyone seemed to talk about. The pages of the Investor’s Digest were crammed full of reports on the latest hot, new exploration prospect.
In Canada, we had the investment trust craze around this time as well. Companies were falling over themselves trying to figure out how they could turn themselves into a bond. The government eventually put a stop to that particular bit of fun. And then there was the mammoth housing bubble that inflated and then burst in epic fashion, nearly taking down the entire financial system with it. Before the wheels came off the bus, all the talk was about the neighbour or the brother-in-law that was raking it in in real estate.
We had a manic run for gold in there. Biotech stocks had their day in the sun. 3D printing had a brief turn in the limelight. Today it is the cannabis stocks and cryptocurrencies and blockchain technology stocks that are the belles of the ball.
There always seems to be some sector of the investing world that captures people’s imagination. It’s easy to get caught up in the hype. There may be some new technology, as with the blockchain or the internet stocks in the 90s that really does seem like it could transform the world. Or there could be a government de-regulation that suddenly frees up a previously constrained sector, as with the telecom stocks in the late 90’s or the marijuana stocks of today. The initial seed takes root and spawns some early successes. These are followed by a rush of money into the sector with new companies, new ideas and new investors being drawn in like moths to a flame. Early investors enjoy big gains and talk them up to all their friends. If the hype goes on long enough, it eventually starts sucking neophytes into the space who may not know much about distributed ledger technology but know that their friend is making a killing trading bitcoin in his pyjamas.
It can be very hard to avoid the allure of investing in these sectors. When everyone at the local coffee shop or standing around the water cooler is talking about these stocks and regaling you with tales of overnight riches, you can feel like an idiot if you aren’t taking part.
I’m here to tell you emphatically that nothing could be further from the truth. It’s okay not to play! I’ve done very well with my portfolio of unloved, overlooked, underappreciated stocks that invariably have nothing to do with the flavour of the month. I’ve almost never been invested in the hottest sectors. My brand of investing involves looking for profitable companies or companies with a history of profitability and buying them as cheaply as I can. Almost by definition this means I hardly ever get to play in the newest, most exciting corners of the market.
Marijuana has yet to be fully legalized and the blockchain is a very interesting and exciting technology still looking for its big breakthrough into widespread adoption. Almost all of the companies in these sectors are losing money.
My fundamental, value-oriented approach almost never leads me to this kind of stock. And that’s okay. I’ve scored big wins with companies that do completely uninspiring things. Shares in a beaten down clothing retailer went up 8 fold. An investment in a company that made call center software tripled overnight. A company that made industrial abrasives was a big winner for me and more recently, an investment in a company that deals with waste methane gas emissions has gone up by more than 6 times from its lows.
There’s plenty of excitement and very good long-term returns to be had without ever having to get caught up in the current investment fad of the day.
The story stocks that are fun to talk about and exciting to own (at least initially) can give you great results in the short term, but longer term, you often end up getting burned. I have a little saying that I use on myself whenever the temptation to take a “flyer” on one of these kinds of stocks rears its head. I ask myself, “What is the best way to profit from a herd of rampaging elephants?” The answer: “Stay out of the way.”
My goal here is not to heap disparagement on you if you’ve bought a blockchain or pot stock. There can be good money to be had in these “glamour” or “story” stocks if you manage to time your exit properly. If you are an experienced day trader who has his or her finger on the pulse of the market then maybe you can ride the ups and downs like a pro. Or if you have an unusually clear crystal ball, maybe you can get in and out of the latest hot sector at just the right time. A good friend of mine says he has paid for his kids’ university education with marijuana stocks. As long as the profits don’t go up in smoke, that’s wonderful and I don’t begrudge him his success one bit. I think I’ve got my kids’ tuition costs covered as well, and I would love it if everyone could use the capital markets to fund the education of our future generations, but I’ve done it with auto parts and cargo transport companies (among other things) instead of pot and penny mining. My point is that you have a choice. You can be very successful as an investor without ever once participating in the most popular stocks and the hottest sectors.
A lot of people who are reading this blog are fairly new to investing. If you don’t have the experience of 20 years of investing behind you, it can be easy to feel pressured into buying in to these sectors that everyone is talking about. There is no denying that, assuming marijuana is legalized in Canada this summer, many of us hosers will be partaking. If I could figure out how to actually buy a bitcoin, I’d be awfully tempted to do so. These are exciting areas and there will likely be some very good companies that emerge from the pack of contenders. Some of them might even make good investments. But if you don’t think you have a reliable way of telling which ones the ultimate winners will be, then you don’t need to play along. If the hype and the hoopla make you uneasy, then it’s perfectly fine to remain a casual observer on the sidelines. It doesn’t mean that you are a dinosaur or that you are stupidly passing up the opportunity of a lifetime. Sit back and enjoy the show. There could very well be wonderful turnaround opportunities to be had down the road, when the hype eventually turns to dismay as it so often does.