Paul Winkler: Welcome to “The Investor Coaching Show.” I’m Paul Winkler, talking money and investing here as always. I’m joined by Mr. Jim Wood, who’s hanging out here with me for this hour.
Jim Wood: Good day, sir.
PW: Man, good day, eh? The guys from the Bob and —
JW: Bob and Doug McKenzie. It’s going to be that time. They have the Christmas song. We’ll probably be hearing that.
PW: That’s going way back. Those of you younger people have no clue what we’re talking about.
PW: All right. We talk about finances and help clear up some of the myths about investing and some of the myths that are out there. It just seems like there are so many people out there giving guidance without a lot of academic backing to what they’re saying. More about that another time.
So, Jim, I’ll let you kind of run. What do you have? I figured I’d let you throw out some topics and I’ll just respond.
Investing in New Technology
JW: Well, that sounds good. I’ve been doing a little bit of reading so let’s talk about an article. This is from Michael Kitces’ website, kitces.com.
PW: Mm-hmm. You’ll find that Michael does a lot of college work and financial planning. He has something called the Nerd’s Eye View, because he’s very nerdy.
JW: Yeah. Absolutely. This was written by Larry Swedroe, about avoiding getting caught up —
PW: I remember meeting Larry 25 years ago. Yep. Yeah. Anyway.
JW: Good researcher.
PW: He does a good job. Yes. He does a really good job.
JW: He does academic research, applied academics, that type of thing. But this article is just avoiding getting caught up in big market delusions. It particularly talks about a case study with electric vehicles.
I think it’s always a good topic: people getting really, really excited about some new technology, some new product or something that has this vast use. There’s a huge market for it. People say, “Yeah, I want to invest in that because that’s going to make me rich.”
PW: It’s going to be the up-and-coming thing. It’s interesting because trying to predict the future on those types of things is just next to impossible.
Who would’ve thought that the news would come out that the range on the vehicles would be much shorter than what was expected?
Who would be able to figure out the geopolitical risks of investing in something where you need materials from other countries?
Then who would predict that Exxon would actually start drilling for lithium in the United States? That’s the latest thing in the news this week. Who would think it would be an oil company?
Because what does everybody always say? “Oh, this is a conspiracy.” Those oil companies are trying to buy up the technology, and they buy it up and then they go and quash it. They just destroy it so it doesn’t compete with them.
And lo and behold, you find out that Exxon’s actually drilling in Arkansas — I think it was — for lithium. They’re looking for the next up-and-coming thing. Anyway.
JW: That’s what rational companies do. They want to continue to exist. If they think that there might be some future issues with their current products, they want to change or expand their product lines. A case of a company that didn’t do that is, of course, Kodak.
PW: Yeah. They invent the digital camera and they decide that it’s going nowhere, which is kind of funny if you think about it. Yeah, it’s going nowhere and everybody’s got one in their pocket now.
JW: Right. Exactly. That’s just it. There are new technologies.
Overestimating Investment Abilities
JW: Historically, this has happened time and time again. Of course, you look at the dot-com bubble, and the housing bubble — which wasn’t new technology, but it was a big market that kind of blew up again that people were throwing extra money at for a while.
It even goes back to 1841, when Charles McKay wrote “Extraordinary Popular Delusions and the Madness of Crowds.” Even he was talking about that, so this is something that happens generationally.
PW: Of course, you look at that book and they haven’t changed. People say the markets are so volatile now. They’ve always been volatile. There has always been madness in crowds where people chase things.
I love Burton Malkiel’s whole history of that, where he just walks back through the 1960s. In the madness of crowds, people get excited about things, they run them up and they turn out to not be what they think they’re going to be, or they’re bigger than they think they’re going to be. One way or the other, they’re wrong, and then, of course, people get hurt investing that way.
JW: That’s back to kind of a basic investing lesson.
Investing isn’t gambling and speculating. It’s not hoping you get lucky and buy the company that’s going to dominate this big new market.
PW: People think you have to do that to be a successful investor, and it’s just not true.
JW: Unfortunately, that’s the message that they’re fed constantly.
What makes this big market delusion? Well, this article talks about four factors, and one of them is the degree of overconfidence. That’s not only overconfidence by investors throwing their money at these companies, but people running the companies that are just thinking that we’re going to dominate this marketplace and we’re going to outperform and we’re going to sell so much.
Whether it’s in their projections, their company documents or company culture, whatever it is that they are driving, people are essentially overestimating their own products and investment abilities.
PW: Jim, it reminds me of the research on small-cap growth stocks. There were small companies that were growth-oriented, really great, well-run companies. Then what happens is you have the hubris of the CEO of the company thinking that they’re better than they really are, that they’ve got more prowess than they actually do.
Oddly enough, that’s one of the things that’s in the data that doesn’t seem to make sense to a lot of us: the fact that small-growth companies have had a lower rate of return from the 1920s than large companies have in any asset and any area of the market in large companies. It’s that hubris, right?
JW: Yeah. It’s officially known as the small-cap anomaly. The size of the market too, when they’re looking at the potential, is something that everybody could use.
The Trajectory of New Technologies
In this case, we’re talking about electric vehicles. It’s not even mentioned in this article, but of course, what this gets me thinking about is the latest craze that this completely describes, which is artificial intelligence. Right?
PW: Okay. Okay.
JW: I mean, it’s everywhere now. All the companies are getting into it and tech companies are getting much, much higher valuations. Their stock prices were going up because of the potential, and they’re not necessarily bringing in any revenue or anything from artificial intelligence yet, but it’s just like, “Oh, these companies are going to integrate it and this is going to change everything.” And it may very well change everything.
PW: Well, it was like technology in the late nineties. I would watch TV and I would just be shaking my head and going, “This is the craziest thing going on out there.”
Bad news kept the market going up. If there was bad news, it kept the market going up because people were so worried about the pricing and what the Fed was doing back in that period of time as well. Sound familiar?
People were looking at technology and going, “Man, this stuff is growing by leaps and bounds, and look where this could lead if it keeps going.”
The problem is that when you look at the trajectory of information and how it affects the valuations of companies and how it affects the possible growth rate of companies, it’s not a line that keeps going at the same level. You might have huge jumps in short periods of time.
It would be like, for example, getting a mutual fund with a three-year track record, let’s say of 15% or something like that. You go, “Wow, if I get a 15% rate of return every year for the next 20 years, here’s how much money I’ll make.”
That’s not how markets work. They don’t go straight up nor does the growth of technology. It’ll go up, it’ll plateau, and then you’ll have your gains.
Then all of a sudden people will notice that it doesn’t have the growth rate that it did before. Then they recognize too late that they paid too much for investments and those investments come crashing down in value, hence what happened in the tech bubble in the early part of 2000, 2001 and 2002.
JW: Absolutely. There’s a name for this, and I wish I could come up with it because I read this and the concept always stuck with me, but the name didn’t. But it’s essentially looking at the impact of new technologies where the market tends to overestimate its initial impact.
Think of the dot-com bubble and all the money that was thrown at companies that crashed and burned 80% in early 2001 and 2002. Long-term, that technology sometimes is underestimated. Short-term, people bet on it and get huge valuations that crash, but 10 years later that technology is having a huge impact.
PW:Yeah, that’s an interesting concept — that it’s actually underestimated in the long run and overestimated in the short run.
JW: Exactly.
PW: Yeah.
JW: Think of the Internet. I mean that’s absolutely true because think of all the things that were promised in the early 2000s, compared to what’s happening today, a decade later.
PW: Yeah, it’s much worse than we thought it would be. No, I’m just joking. Talking about people’s addictions to it.
Warning Signs of Big Market Delusion
JW: What are some of the warning signs of this big market delusion? Well, a lot of stories — a lot of media stories and a lot of media coverage — I think that’s what really drives so much of this.
It’s the next hot thing, and this is exciting. This is going to change everybody’s lives. There’s just the part of many of us that thinks, “Well, hey, how can I profit from that? I should buy that company because I might get rich.”
Because you want to think, Wouldn’t it be great to have bought Amazon when it was public or Microsoft when it first came out? Or all those things. You start thinking that way, but that’s not reality. That’s like hoping to win a lottery ticket.
PW: Yeah, it’s hindsight.
We think that we should have been that person who figured out which company was going to benefit the most.
I was doing some research this week because so often I hear people say, “Look for mutual funds — rate of return should be 12% — and look for funds based on short-term track record — three, five and 10 years.” You hear that type of thing.
One of the guys in here, Brian, has been going through the CPA exam work and he said, “Oh man.” He said, “So often they teach that, to look at a five-year track record.” They look at short-term performance even in that curriculum. It is really bad advice because when you look at a fund that has had good past performance, the No. 1 thing that we find is they don’t go on to repeat.
I call them Morningstar because they track virtually every mutual fund known to mankind, even funds that are sold outside the United States, ETFs, separately traded accounts, separate accounts and things like that. What I wanted to do, Jim, is I wanted to see, if you look back through history — and I just arbitrarily chose the year 1970 — how many funds were available from 1970 until now, and how many funds have actually had that rate of return?
I didn’t know how many there’d be. The answer is, what are there? About 14,000 mutual funds out there now? Something like that.
JW: Yeah, I think twice that.
PW: Well, I’m looking at single share classes without looking at multiple share classes. But you look at that and you say, “How many funds actually had that rate of return back to 1970?” The answer was two.
You go, “Well, what are your odds?” Two out of maybe 28,000 mutual funds or however many, what are your odds that you would’ve, A, bought one of the two funds that had that rate of return, and B, held onto it for that entire period of time?
JW: Yeah. And you didn’t get it near the end when they had that great track record. That’s what happens with so many of these funds that get on a hot streak. People will pile into them after they’ve had the track record, but they never get that track record.
PW: That’s right. That’s exactly right. Yeah.
Learning From Experience
PW: People look at something and go, “Wow, look at the return of this.” And they assume it’s going to continue on. But what people don’t recognize is where that comes from: the sales side of the investing industry.
If I can show you the track record of a mutual fund and you go, “Wow, this had a really great return,” you’re more likely to buy it because you think it’s going to continue because you’re subject as a consumer to the same biases. Now the investing people are subject to it because it moves product, it gets you to invest, it gets you to buy what they’re selling, but you would buy it because you want to go toward it.
Instinctively, we want to go toward pleasure.
People don’t recognize that track record is not what you look at, but it’s so often taught.
This would be a perfect example of where we look at something like a technology coming on and say, “Wow, look at what it’s done so far this decade. Look at how it’s going to impact the world.” And you may be right, it may impact the world that way, but the returns are typically gotten before you ever figure out that you want to invest in it. By then, the horse is out of the barn.
JW: Right. We’re wired to learn from experience. You put your hand on the hot stove, you burn yourself. You say, “Okay, maybe I shouldn’t do that anymore.”
Like you said, we want to move toward things that are pleasurable. If it’s our favorite ice cream, we want to buy more of that. If we like pizza, we want to buy more of that.
It works great from a survivability standpoint, from living in a cave trying to find food and things like that. But those same skills don’t apply to investing.
Overconfidence and Blindness to Competition
PW: Jim is talking about some warning signs and delusions. None of us are deluded. I’m not deluded. You’re deluded?
JW: I think you have a delusion about that.
PW: Just depends. Nice. Turn it against me, will you? Okay. Go ahead.
JW: We talked about the first one and the second one.
PW: The first one, reiterate it for those who just tuned in.
JW: I can do that. That’s —
PW: Overconfidence.
JW: Big market stories, meaning that every time you open up the internet, your browser or look at any magazines or something, they’re talking about these companies or this technology. Think artificial intelligence right now. That’s a perfect example.
PW: So kind of the bias would be availability. I think that that would be under that. That’s what’s in front of you.
JW: Yeah, absolutely. I think that’s a good way to phrase it.
No. 2 is blindness to competition. A lot of times, even when you’re hearing about this stuff, you’re always hearing about some company that’s either the leader or the most well-known or has a personality attached to it or something.
But whenever there’s something like this, it’s capitalism. There’s going to be competition. And a lot of times, people will forget that there are a lot of companies that are trying to succeed out here, and maybe just one or two out of many are going to be successful.
How likely are you to actually be able to just pick those winners?
What happens then is that all the companies tend to go up in value. Even if at those valuations, even if all of them are successful, you won’t get the revenue to justify their stock prices.
PW: So if we were going to use a real-life example here, let’s look at cell phones. We look at Motorola, the inventor of the cell phone, and we think, Wow, they’re the inventor of the cell phone, they ought to do really, really well because people are going to be wanting to use cell phones.
Now, you wouldn’t have necessarily thought that Apple or Nokia would be the two companies that would be battling it out regarding cell phones. You would think the inventor of that cell phone would be.
You don’t think about the competition being so — well, look at the competition. I mean, it was just crazy how these few companies battled it out.
But we don’t remember the losers in the battle. We only remember the winners. It’s kind of like what we often teach at workshops: It’s the companies. They choose us.
JW: Along those lines, that’s actually part of an example that they talked about in this. Think about PalmPilot.
PW: Yes, I used to have one. I actually used to. People laughed at me.
I had a PalmPilot. I was one of the earlier adopters.
JW: I was a late adopter and actually kept it longer, after people had moved on to other stuff. But that was spun off by 3Com at an evaluation larger than General Motors. Fascinating. Only a few years after that, though, they were out of business.
PW: That’s incredible. What an amazing statistic. Larger than General Motors?
JW: Right.
PW: That’s insane.
JW: And a couple of years later, they’re out of business because of Blackberry.
PW: Yep. Okay.
JW: Which was itself soon on the ropes.
PW: Oh, I like that.
JW: Because of competition from Nokia.
PW: Nokia. Okay.
JW: You never know where that disruption’s going to come along the way. Again, it’s just kind of making those big bets.
Focusing on Growth and Forgetting Fundamentals
No. 3, these companies are all about growth. So rather than creating sometimes sensible business plans or putting aside their business models or ignoring them or deviating from them, they’re pushing and pushing and pushing for growth, which hurts the long-term viability of the companies, and all of a sudden the companies go — as in a video that we show our clients — poof.
PW: Yeah. Well, South Park.
JW: Right.
PW: What? It’s gone.
JW: And it’s gone.
PW: We don’t normally watch South Park around here, but they do have a funny video about a bank.
But yes, so you look at that and say, “Wow, they’re growing. They’re trying to grow.” And I think a lot of it is they’re doing the best that they possibly can, but they don’t necessarily know what the tastes and preferences of the public are going to be, so they may be growing in ways that are not necessarily where the public would like to see them go, but they’re taking their best guess.
But fashions change and tastes change, and therefore what happens is they throw money into projects that might work out wonderfully well, but they may also flop wonderfully. Not wonderfully, that’s probably a bad choice of word.
So yeah, that is a challenge. Growth.
You’ve got to grow. Grow or die.
JW: I think this fourth one is really related to No. 3: a disconnect from fundamentals. The result of all that stuff is that companies throughout the industry become completely disconnected from their fundamentals — like earnings, revenue and things that people measure a company’s success by — and it’s just all about potential growth, that type of thing.
To me, that’s just describing the tech bubble, right? I mean, there are lots of other examples of that.
PW: It’s hard to fault them for that, in a way. Because you can have a company that has a lot of expenses and they’ve got no revenue, and their company’s stock may be selling for 100 times earnings, but all of a sudden, let’s say that you get your expenses down just a little bit and your earnings up a little bit, you can be back into normal territory — under 20 — pretty quickly.
Greater Fool Theory
JW: Well, what I remember about this idea is that when I first got into the industry, somebody was giving us a talk about some of the tech stocks and talking about, I believe it was pets.com. There was a talking sock puppet or something.
PW: Yeah, that was used as an example a lot. Sure.
JW: Absolutely. And that company had a higher market capitalization than major airlines that owned hundreds of planes.
PW: Oh, yeah. Yeah, that is ridiculous.
JW: Exactly.
PW: That’s a really good example, because we do see that. We even saw it with, remember GameStop?
JW: Yeah. Oh, yeah. The meme stocks. Absolutely.
PW: That one went up like crazy. And then everyone was like, “Wow, is it going to keep going?” And you go, “Good grief, what are you doing?”
I remember being interviewed — Pamela Furr actually was interviewing me and talking to me about it, and she said, “What’s going on?”
I said, “It’s a greater fool theory. What will people pay? Who’s the next person that might pay a little higher price for this thing, whatever it may be, than I did?”
And then people think it’s just going to keep going up, but there’s no fundamental reason for it to be selling for what it’s selling for.
What you’re buying when you buy stock is the rights to the earnings of the company. You’re also buying the assets of the company.
So it’s typically something we look at. We look at both of those things: book values and those types of things.
Quite often — and I’m not saying that you use this to determine which stocks to buy and which stocks not to buy — this is what markets do. You’re not going to be able to use this information, in other words, to increase your returns through your brilliant prowess and anything like that.
The Wealthy and the Stock Market
It just reminded me of a conversation I was having with a friend of mine this week, and she was talking about a friend of hers who was all into what you’re talking about.
“You need to yank all of your money out of this bank,” her friend said. And she said, “What do you think, Paul?”
I asked her about the amount of money she had in the bank. We were talking about FDIC limits and we were looking at what happens typically when banks get taken over and so on and so forth.
I wasn’t going to give her any kind of guidance on whether that particular bank was going to go under. It was a very large bank. But what she was really talking about was the stock market being rigged by the rich.
I said, “Oh, really? Well, if you look at the growth in the wealth and the research that has been done on the growth of the wealth of the richest people in the world, why has it been lower for the vast majority of the rich than the stock market growth over the last 30 years? Now, there are a couple of anomalies that we can pick out for sure. They’re the winners of life’s lottery.
But the reality is most wealthy people can’t get returns that are higher than the market when it really gets down to it. If it were really rigged, who would rig it? Those really wealthy people, and they would be getting huge returns out of doing that.”
And she said, “Wow, good point.” I said, “Yeah, and the reality of it is that there are too many players in this thing called the market to rig it.”
It’s not where you can corner the market in some areas. You’ve seen stories about that in the past with certain commodities, where the market has been cornered or the supply has been controlled in those areas. You don’t have that same thing happening in markets.
With a lot of this stuff, you get people that hear things, then get scared and make decisions based on emotional types of criteria.
To this lady we were just talking about, I said, “You look back couple thousand years, and people were quitting their jobs, and Paul the apostle told them, ‘Don’t quit your job. You’re not going to eat if you don’t work.’”
Conspiracies aren’t anything new.
But yeah, go ahead, Jim.
JW: I’m just thinking. You think of all the rich people who have been in the news over the years, so you think it’s rigged for the rich, but think of all the rich people who were taken advantage of by Bernie Madoff. I mean, there’s a laundry list of celebrities and even billion-dollar investment managers that lost money.
There are lots of other cases where they’ve been scammed individually or as groups and things like that. And if it was all about just the rich, then like I said, there wouldn’t be that many stories like that.
PW: Yeah, for sure.
Big Market Delusions
PW: You’re talking about, let’s kind of lay in a nutshell, what would we say this topic really is.
Jim Wood: Big market delusions, meaning that people get overexcited about individual companies or individual new technologies and kind of put all their hopes and dreams in terms of their financial future into these companies.
PW: And people want to hit home runs, so investing in individual companies is typically where they hear about people hitting home runs.
JW: Yeah.
PW: So they hope that they can be that person.
JW: Right. They want to win the lottery.
PW: As we pointed out so many times, we have had companies that we thought would be the winners, that didn’t turn out to be the winners. And you were talking about electric vehicles as well.
JW: Yeah. That was really the headline of this. And we’ve kind of talked through it, but we haven’t really talked about the specifics of the electric vehicles.
A couple of studies were done — academic studies. One of them was Big Market Delusions: Electric Vehicles by Robert Arnott, Bradford Cornell and Lillian Wu in March of 2021. This is just some information from that.
The electric vehicle industry has nearly the same market capitalization as traditional automakers, despite having only a small fraction of the revenue.
PW: Yeah. That is a perfect example of people thinking that something is going to be really big and betting — I mean, no other word to use — that that is going to be the case.
Chad was talking to me in the Goodlettsville office. He was reading something and he said, “Man, you see this? China’s got us beat on this particular thing.” And I said, “Oh, what is it?”
He said, “They’ve got these stations, and then you pull into the station, and it’s kind of like pulling into a Jiffy Lube or something. What happens is you pull in and they drop the battery out of the bottom of your car, I think it is. Then what they do is, they put in a charge battery in its place.”
It reminded me of these propane tanks. You take your propane tank back.
JW: For the barbecue. Sure.
PW: Yeah. And then you get a full tank, and you bring that back, and you just give up your old tank, and who cares? It’s just the container holding the gas, and that’s all it is. That’s the thing that they’re doing.
I said, “Well, yeah, but we still don’t know if that’s going to be the technology simply because of the fact that we have people looking at taking these batteries after they’ve lived their lifespan, and now we’re having people in poor countries pull these things apart, and the impact of that.”
And then Chad brought up the fuel. He said, “I think about it, yeah. How do we generate electricity?” Well, a lot of times, unfortunately, it’s through non-clean methods, and it just may not be the technology that wins the day, but people have been betting on it in a big way and driving the price of the stocks up to levels of companies that have been around for generations.
Users Benefiting from Technology
JW: Yeah. You think of the technology you were describing, and you think of Nashville or other big cities, and maybe 5% of the population — I don’t know what the true number is — are driving electric vehicles.
But think about if it’s 80%. How many of those stations where you have to drive in and get a new battery because your battery’s completely depleted or something like that are ongoing? Just think about some of the lines you’d have to wait in just to get a smog check. You know? But what’s great about that is that it’s innovative.
And it’s maybe, “Okay, this is a problem, this is a possible solution,” and it may or may not be.
PW: I did like the idea, yeah.
JW: I think that’s ultimately what drives these things forward. And I love that about capitalism, that it pushes those things.
The problem is, of course, when people start betting and saying, “Okay, this technology is going to be the winner.”
I think that long-term we’re going to see, as history’s shown for the last nine decades — or really even longer than that — the world’s getting healthier and wealthier and will continue.
PW: Mm-hmm.
Now you were talking about hoping that those companies that have come up with these technologies are the winners and they’re going to benefit greatly. One of the things I’ve pointed out to people all the time is that it isn’t necessarily the company that comes up with the technology that benefits and wins; it’s the user of the technology, because users of technology use it to reduce their costs, to increase their profitability, to increase their productivity. So often we forget about that.
It is not necessarily the company that comes up with the technology that benefits; it is often the end user.
And if I’m not investing in those companies that are going to be the ultimate users of the technology, I could be missing out on a lot, and I could be taking way more risks than I should be taking to where I could end up with a couple of companies that I thought were going to be winners, and they ultimately did not end up being winners.
JW: Absolutely. And I’m going to touch back on that point here in a minute after I finish this one more thought.
Betting on Individual Companies
JW: I want to talk about Tesla’s market cap of $752 billion. At the end of 2021, Tesla accounted for 75% of the total electronic vehicles group’s market value. Such an immense market capitalization makes sense only if the expectation is that Tesla will come to dominate the entire auto industry, not just the EV market.
PW: Now that’s really interesting, Jim, because you know what that makes me think about is, who would step in if one company ended up being the company that dominated? The government. The government is going to look at that and go, “Antitrust, antitrust.”
JW: Yeah, eventually.
PW: You can’t do that. So that then doesn’t even make sense to bet on a company in that way. That’s fascinating. Sorry, keep going.
JW: Just to finish that, such an achievement requires that both Tesla’s brand and technology become so dominant that the company can earn profit margins that exceed those of Ferrari on a level of production exceeding that of Toyota.
PW: That’s insane. So you look at some of these companies that come out with these boutique cars, and they only produce a few of them, because that’s all they have to produce, because they charge so much for them, because the people willing to buy them are willing to pay a price that is so high, more for prestige than anything else.
You’re not getting the entire world population buying stuff and overpaying for it based on prestige, especially when another company can come up with a product that you’ll buy for less to compete with that. And, of course, they will. That’s exactly the way it always works.
JW: Exactly. So anyway, I just wanted to finish that. But I think what you were saying kind of dovetails into something else that I had for today.
PW:
Some of the mistakes that we see people quite often make have to do with looking for individual companies that are going to win.
You watch TV shows on this stuff. I tune out when I get in the financial shows and they start talking about individual companies. That’s when I go, “I don’t even want to hear this.” It is boring.
But they talk about what this company did, what that company did and all they’re doing is just getting you to do things that you really shouldn’t do, or telling you which markets are doing well right now.
You would find a certain segment of the market that would show the tickers on it on a regular basis, and then when that market dies and it is not doing well, all of a sudden they don’t report on it anymore. It’s just the weirdest thing. I don’t know.
But anyway, next, Jim?
JW: Well, I think that this dovetails really well with the whole big market delusion idea. There’s this article from Visual Capitalists, “The 25 Worst Stocks By Shareholder Wealth Losses From 1926 Through 2022.” So many of these companies people thought were their lottery tickets.
PW: Oh, this is going to be interesting. I wish I could guess what those companies would be, but I probably couldn’t.
JW: I think you’d probably nail a lot of them on the head, but I think you’ll all be really surprised by some of them, as I was.
Shareholder Wealth Losses
PW: Enron, Global Crossing? Well, Global Crossing, because they would have gone and said, “We’re going to be laying fiber optic cable.”
That was going to be the wonderful thing that was going to change the entire world.
But anyway, go ahead.
JW: It had a big potential market and was talked about a lot in the media, all the things we’re talking about in the last couple of segments. Well, that’s No. 20 on the list.
PW: Oh, is it down there?
JW: Yeah.
PW: It was on there.
JW: It is.
PW: Okay, all right.
JW: Surprisingly, Enron is not on the list.
PW: Enron is not on the list? Oh, come on. That’s a big mess.
JW: It might have something to do with the way they measured these. But a company from not unsimilar times around that is No. 1: WorldCom.
PW: Okay. Yep. I should have thought of that.
JW: I mean you might’ve thought of that company, not necessarily being No. 1. They were a long-distance phone provider, handled internet data and they basically got caught cooking their books, right?
PW: There were a lot of people that got sucked in by that.
JW: This was measured for WorldCom, from December 1980 through July 2002: Lifetime wealth losses were 102 billion.
PW: Oh, man.
JW: No. 1 on the list. July 2002 was very significant in terms of the dot-com bubble blowing up.
But back to what we were just talking about earlier. No. 2 on the list is Rivian Automotive.
PW: Oh, okay. That wouldn’t have crossed my mind. Yeah, I know I followed and heard the stories a little bit, but not a lot.
JW: I see them out driving on the road and everything because they’ll catch your eye because there’s not that many of them compared to other cars. So, you see one and it catches your eye because it’s not as homogenous as so many of the cars are. But from December 1921 through December 1922, lifetime wealth losses were 92 billion.
PW: Ouch. Makes Bernie Madoff look like a pauper.
JW: I had somebody I remember talking to me about how proud they were that they had bought that stock and that it was going to compete with Tesla and do all these things. Again, it just shows the danger.
But some of the ones on the list you can name. There are all kinds of different industries. There’s Lucent Technologies, Wachovia.
PW: Right, some of the banking. Yeah, of course.
JW: Coinbase in at No. 12.
PW: Did PalmPilot make it?
JW: Palm did.
PW: Did they?
JW: Yeah, Palm was No. 18. So, two even above Global Crossing from April 2000 through June 2010. Negative 34 billion.
PW: Oh, wow. How about some of the movie companies?
JW: Well, No. 22.
PW: All right.
JW: That was a good poll. No. 22 was Paramount. July 1987 through December 2022. Minus 30 billion.
PW: Oh, man.
JW: And I would guess that they’re coming back a little bit because their streaming channel, I think, is doing pretty well. That’s why I give these dates and everything.
PW: How about, since I’m on a roll, cryptocurrency?
JW: Well, that’s where I was going next.
PW: Oh, okay, all right.
JW: Up at No. 12 with Coinbase.
PW: Okay, there you go.
JW: May 2021 through December 2022. Minus 45 billion.
Unexpected Stock Losses
JW: Here’s a couple on the list that you might not think initially were on here because they came out and they solved a problem and a lot of people used their services. They enabled people to be independent business people on their own and rent their place for money.
PW: Airbnb?
JW: There you go. No. 25 on the list, minus 27 billion.
PW: Interesting.
JW: Between January 2021 through December 2022, this company didn’t rent out their place, but they drove people around.
PW: Uber.
JW: Yeah, there you go. No. 19. Coming in at No. 19 on the list, Uber.
PW: I had a 50/50 shot on that one.
JW: At minus 34 billion. So, you think of all these different companies, but how about this one? This one was — actually two of these are, numbers 15 and 16 — a company that was really big and had some diversification in the product lines and things like that.
Time Warner at No. 15, negative 37 billion between April 1992 and June 2018. And Kraft Heinz.
PW: That’s interesting because how many of us use the products from those companies.
JW: Right? I mean, you know? What do you think of when you think of Kraft Heinz? You think of American cheese and ketchup.
PW: Yeah, yeah, of course, yeah. Well, I remember, this is probably not on the list. I doubt it. But I remember Proctor & Gamble was one of those companies that ran into problems.
JW: Not on the list, but yeah.
PW: Not on the list. But I remember people who were working for Procter & Gamble and thinking, This company is just bulletproof. It’s going to do well.
And then they ended up losing their shirts because there was a period of time that they went through a really bad spell. But the companies are fine still. We still use their products, but an investor in the stock would’ve been really hurt at various points in time.
JW: And then the car company Daimler.
PW: Daimler?
JW: Yeah, Daimler.
PW: Yeah, of course. You had DaimlerChrysler, the joint venture.
JW: Yeah. December 1998 through June 2010. Minus 60 billion.
So, there’s no real rhyme or reason to these companies.
The message here to me is that individual stocks are one of the quickest ways to shoot yourself in the foot as an investor.
PW: Yeah, and I think that it’s unfortunate that often people will do that because they think that they know more than they do. Their level of confidence goes up because they know the company. Maybe they work for the company and they know the internals of the company to some extent, and they think they know more than they do. Even with the CEOs of companies, you’ll find that.
Typically, what I tell people is, if you have individual stock — let’s say you’re an executive with a large corporation, and there may be some really huge tax consequences or maybe you can’t get out of it, period, end of sentence, you can’t do anything with the stock — there is probably just a tiny, tiny handful of instances when I can see using options to protect your downside risk making sense.
So, when you’re dealing with individual companies, that’s where that makes sense because you can get hammered with individual companies, individual stocks.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
