Trading Stocks and Blank Check Companies

We have always said investing is different than trading stocks. On one hand you’re looking to participate in the long-term profitability of a company, whereas with the latter you are really just trying to buy a stock that you can later sell at a gain, and the sooner the better. In either case, the participants are the same; be it a long-term investor or short-term trader, you are still dealing with a bunch of human beings who are buying and selling these instruments – and if nothing else, human beings are emotional and potentially irrational. And if they act in concert, then “like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. People may become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

This may describe the situation with stocks like Gamestop (“GME”) and AMC Entertainment (“AMC”), two companies that seemingly had little to no profitable future two months ago (in fact, two months ago some news outlets were predicting an AMC bankruptcy filing). But then traders started buying these stocks; add a bunch of social media enthusiasm, and next thing you know we have a full-blown mania. To add fuel to the fire, some short sellers were getting squeezed. What this means is that some individuals and institutions who had sold the stock when it was low (thus they were “short” the stock since they sold what they did not own), hoping that they could buy the stock after it goes even lower, were very anxious as the stock went higher. Ultimately, these short sellers felt “squeezed” because they had to cut their losses and buy back the stock at a higher price. So, ironically enough, to close their short positions they had to buy the stock, which in turn may have begotten even more buying (since some folks may simply buy a stock that is going up because they naively think that what happened yesterday will happen tomorrow). Long story made short, GME went from approximately $17/share on January 4th, to $347/share on January 27th, and then down to $49/share as of February 9th; a typical mania where some people make a killing and others get killed.

But make no mistake about this: the volatile stock moves most likely had nothing at all to do with fundamental analysis of the company, the market, or the economy; it may simply have been a bunch of traders whipsawing the stock around trying to make a quick buck. But never forget that for every person that buys a stock at a low price and then sells at a higher price, there has to be someone else who sold at that lower price and bought at the higher price. And I know this sounds insensitive, but we have little sympathy for the traders and (especially) the short-sellers who lost money since they both should have known the risks of gambling with money by treating the market like a roulette wheel – where you will either get lucky or unlucky. But people are people, and sometimes you can’t stop them from trying to profit from a likely impossibility even though they’d be better off with an unconvincing possibility.

Speaking of irrational investing, we would like to address another strategy or product we do not believe in much less advocate; they are called Special Purpose Acquisition Companies (“SPACs”), also known as blank-check companies. Simply put, these are investment vehicles that raise money through an initial public offering (“IPO”) and then go looking for a company to invest in (and when they do acquire a company, it basically makes that previously private company a public one). That’s right, these SPACs are essentially empty corporate shells of cash when they go public, and if you invest before they make an acquisition then you would be giving them your money with only the hope that they find the right company to invest in! To me, this seems to be the definition of just hoping to get lucky rather than actually investing!

Even scarier is the fact SPACs accounted for almost half of all IPOs in 2020 and raised more than $80 billion, more than every other year combined. And though there may be some winners, the only thing I am convinced of is that the people who structure these deals will get paid well regardless of what happens. And if you think I am a sceptic, just consider that two of the most diametrically opposed people on the planet, Senator Ted Cruz and Representative Alexandria Ocasio-Cortez, agree that these things must be carefully monitored as potentially harmful investment products. In any case, we think this may possibly be another example of an irrationally exuberant market. And yes, I am purposefully using Alan Greenspan’s famous words since there may be similarities to the late 90’s, including the fact that he spoke those words four years before the Tech Crash. Similarly, for better or worse, we believe that the market is more likely to continue up than down in the short-term. But we have been doing this for far too long to think that the markets will not rationalize one day, and when it does, we hope people will have prepared.

For our part, we do not like nor do we recommend trading stocks or buying SPACs as we think they’re too risky for most people and have little to do with financial or investment planning. Instead, we remind everyone that the future is and always will be unknown and unknowable, and thus the best course is to control the controllable variables, prepare for good and bad times in good and bad times, and try not to get caught up in the exuberance of the day. Because as Charles MacKay (quoted in the first paragraph) relayed to us in his seminal book from 1841, Extraordinary Popular Delusions and the Madness of Crowds, people can get caught up in the delusion of the moment, but it may only last until the next folly comes along.

As always, thanks so much for your friendship and trust, and thank you for your continued referrals!