Step Right Up, Folks... And Lose Money
It has never been easier to lose money in the stock market...
Between special purpose acquisition companies ("SPACs"), meme stocks, cryptocurrencies, and now artificial intelligence ("AI"), investors seem to be chasing one bubble after the next.
And each one ends the same way... and it's not with the air slowly seeping out.
Yet, it's happening again.
And it'll happen again...
And again...
SPACs are passé, but IPOs are back...
And with any kind of IPO resurgence, this means a bunch of companies that should never go public, will – this year, look no further than VinFast Auto (VFS) or Sacks Parente Golf (SPGC) since each went public…
The revival of crypto is sure to spawn a new crop of crummy coins and cons.
As for AI... it has a resilience not seen since the early days of the Internet, even though there are really just a few public companies that can genuinely lay claim to AI.
Here's the thing, and it's something I've written in the past but continues to confound me...
With thousands of publicly traded companies, why is it that investors tend to gravitate to the likely losers? Or, as I recently wrote, the "financially fragile"? Or companies so speculative that chances of making money with them are likely less than buying a scratch-off at the grocery store?
A big reason, of course, is human nature...
Making money is fun, but making it fast is even better. Fear of missing out ("FOMO") is a powerful motivator and, let's face it, you only live once (“YOLO”).
You've done it... I've done it... heck, even the brilliant physicist Isaac Newton has done it. Or as one of my followers on Threads put it...
Actually, it was the South Sea Bubble, the English version of FOMO in the 1700s. As the Wall Street Journal’s Jason Zweig wrote in his update of Benjamin Graham’s classic, “The Intelligent Investor”…
Sensing that the market was getting out of hand, the great physicist muttered that he 'could calculate the motions of the heavenly bodies, but not the madness of the people.' Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003's] money. For the rest of his life, he forbade anyone to speak the words 'South Sea' in his presence.
FOMO is like a magnet... It just pulls you in. YOLO gives you an alibi. It's why traders trade and gamblers gamble.
But there is another way...
It's called investing.
Maybe I'm old fashioned – and, yes, I'm talking my book since I have two paid newsletter – but I still believe you can make money the old-fashioned way, by buying individual stocks.
It has been nearly two years since I joined Empire Financial Research. It represented a major shift for me – going from mostly writing about companies that might make good shorts to those that might be good longs.
But not just any longs...
One thing most of the stocks in my model portfolios at Empire have in common: They're real companies with real products and services that generate real revenue and real profits, and they have real free cash flow.
Some pay dividends. Some are more active repurchasing their own stocks. Others do neither – preferring to sink the money back into the business.
The goal of investing is to find real compounders...
These are companies whose businesses are so good that they will deliver exceptional returns over the long-term.
My favorite tortoise/hare chart is this one, which compares the tech-heavy Nasdaq Composite Index with Warren Buffett's Berkshire Hathaway (BRK-B) since the Nasdaq's bottom during the pandemic...
For all the emotional turmoil the collapse caused, Berkshire investors are still ahead. Obviously, that can teeter-totter depending on the timeframe, but you get the point.
Here's the crazy part...
In the process of finding some of these compounders, it turns out that they're not all tortoises...
The block of recommendations in the inaugural issue of Empire Real Wealth in September 2022 included Big Pharma firm Novo Nordisk (NVO), in part on the potential of the company's insulin alternatives that appeared poised to blast off as weight-loss drugs. Readers who followed my advice to buy NVO shares are up roughly 91% since then.
And in February, I green-flagged tech giant Microsoft (MSFT) for its AI prowess. Readers who bought MSFT shares when I recommended them are sitting on gains of around 31%.
Even my two biggest losers (and – news flash! – I do have losers) are two potential big winners... both better buys today than when I launched coverage.
So, yes, it's easier than ever to lose money in the markets. But it's just as easy to make it, assuming you pick wisely.
Before we go: We’ve all done it and you can’t learn how to invest if you haven’t…
What are your biggest FOMO mistakes (or successes) in the markets? I'd love to hear about them – the good and the bad! Let me know in the comments below.
I’m human, so I have a few. The stupidest was a biotech stock I bought after investors I knew for decades spent years extolling the virtues of the company’s cancer treatment. I had owned the stock years earlier, after it was spun off from its parent company… and sold it.
Years later, the same investors were still involved. Their arguments were so compelling that I broke my rule not to buy speculative biotechs. But I wasn’t alone: They also sucked in some of the world’s biggest and best-known investors, including Legg Mason’s Bill Miller.
This was a case where I willfully ignored several signs that would’ve been reason enough to sell. I recently exited for pennies. (I’ll let you hunt for the name. I’ve blocked it out.)
Conversely, but perhaps stupidly…
I followed the same investors into PLx Pharma, which that makes an aspirin product that supposedly doesn’t cause stomach issues. Plus, somebody I respected was on the board.
I take daily baby aspirin, so this intrigued me. It was run by the folks who put Mucinex on the map, and the “story” here is that they would do the same with this product, Vazalore… and that it was so good one of the Big Pharma firms would probably buy it.
But I asked my two cardiologists and my heart surgeon and none of them had heard of it. Plus, it’s absurdly expensive and the boxes at my local Rite-Aid seemed to be gathering dust.
I bought the stock at around $8 per share, and after pondering the hype versus the reality of my simple research, sold it at around $16 per share. It now trades for .02, with the company having filed for bankruptcy.
Win one, lose one… Moral of the story: Stick with real companies, but only if they make real products, but have real sales, real profits, and real free cash flow. The rest is noise.
Final point, if you enjoyed this… that heart button below is there for a reason!
DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts, and should not be construed as investment advice.
Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter and Threads @herbgreenberg.
Great post!!
Exceptional individual investors have a behavioural advantage... staying calm amidst the storm