Bubbles and crashes

Bubble is an overused term.

After 2008, it has become commonplace to describe everything that has been on a good run as “in a bubble”.

US stocks have risen fourfold – but it’s not a bubble. Yes, valuations are stretched, and in certain places very much so. But broadly, this does not qualify as a bubble to my mind.

A bubble is a psychological phenomenon.

Remember, two things move markets – fundamentals and investor psychology.

A bubble happens when the latter takes over, and runs rampant.

Whenever people are investing thinking that the price can only go up – that’s a bad sign. “No price too high” are four of the most dangerous words in investing.

If you don’t mind, I’d like to borrow from one of my favourite investors – Howard Marks – and quote his outline of the psychological progression of a bubble.

  • The economy is growing, and the economic reports are positive.
  • Corporate earnings are rising and beating expectations.
  • The media carry only good news.
  • Securities markets strengthen.
  • Investors grow increasingly confident and optimistic.
  • Risk is perceived as being scarce and benign.
  • Investors think of risk-bearing as a sure route to profit.
  • Greed motivates behavior.
  • Demand for investment opportunities exceeds supply.
  • Asset prices rise beyond intrinsic value.
  • Capital markets are wide open, making it easy to raise money or roll over debt.
  • Defaults are few.
  • Skepticism is low and faith is high, meaning risky deals can be done.
  • No one can imagine things going wrong. No favorable development seems improbable.
  • Everyone assumes things will get better forever.
  • Investors ignore the possibility of loss and worry only about missing opportunities,
  • No one can think of a reason to sell, and no one is forced to sell.
  • Buyers outnumber sellers.
  • Investors would be happy to buy if the market dips.
  • Prices reach new highs.
  • Media celebrate this exciting event.
  • Investors become euphoric and carefree.
  • Security holders marvel at their own intelligence; perhaps they buy more.
  • Those who’ve remained on the sidelines feel remorse; thus they capitulate and buy.
  • Prospective returns are low (or negative).
  • Risk is high.
  • Investors should forget about missing opportunity and worry only about losing money.
  • This is the time for caution!

I think that’s a really brilliant summary.

It’s no help with timing though. Calling a bubble doesn’t necessarily mean calling a top.

“No price too high” investing is a great sign we’re in a bubble, but that doesn’t mean it’s all going to collapse tomorrow.

These things can go on far longer than you think, especially when central banks the world over are providing more liquidity than has ever been provided before.

And calling a bubble doesn’t mean everything in that asset class is doomed – far from it.

Microsoft, Amazon and Apple were all big parts of the tech bubble and bust in 2000.

The rule here is that the best companies are still great long-term investments, even if they are swept up in greedy bubbles and panicked crashes in the short term.

That’s why our energy expert and editor at Exponential Energy Fortunes is doing such a crucial job in the midst of the hydrogen fever over the last couple of months.

Let me be absolutely clear on this though. James was way, way, ahead of the crowd on this one – if you can even call it a crowd at this early stage. It’s more of a gathering. The crowd is still blissfully unaware of what’s been happening, and the opportunities involved.

He was talking to me about all the exciting things going on with hydrogen over a year ago now, and published his first company recommendation to his lucky readers around seven months ago.

I say his “lucky” readers, because that very company passed the 200% gain mark earlier this month. And it’s far from the only one. His other recommendations, of which his four hydrogen stocks make up only a small proportion, are also posting some really impressive profits.

Now, past performance is no guide to future returns, as Sir Isaac Newton himself learned to his annoyance. More on that in a minute.

But James thinks 2020 is going to be an incredible year for investing in renewables, maybe hydrogen in particular. And I am with him all the way.

In fact, in a meeting with him the other day he was telling me that the landscape for investing in renewables is “completely different” now to when he first launched his Exponential Energy Fortunes newsletter and share advisory service.

Back then, he says, an investor scanning for public companies in the clean tech sector had a pretty hard time of it. But now, there are too many companies. He’s begun to face really challenging decisions between many great companies – which one do I go for? It’s just a different ball game now.

Things have come a long way for clean tech stocks in the last 18 months, and it seems that the first investors are finally starting to notice and get excited.

Wiser men than I

George Soros said, “When I see a bubble forming, I rush in to buy”.

He backs himself to see them earlier than other people, and bubbles are where the most money is to be made in the markets.

I think this is roughly where we are now with certain parts of the renewables stockmarket, hydrogen being a good example.

I can tell you we are way ahead of the game on this. As I say, James has been excited about these opportunities for over a year, and wrote to his readers in May last year to their benefit.

Institutions have hardly dipped their toe. Most of the stocks in James’ Exponential Energy Fortunes are still too small to be on mutual funds’ or ETFs’ radars, and most retail investors haven’t even heard of any of them.

So while we’ve seen a few share prices rise 5-10% day after day, sometimes more, with only the normal amount of good news (which is still a lot), I don’t think it’s the end of it by any stretch. I don’t have friends, relatives and the infamous taxi drivers talking to me about niche hydrogen stocks – yet – that’s the old investor’s warning that a bubble has reached its peak.

I’m as bullish as they come when it comes to hydrogen and the stocks on offer from that sector – in the short, medium and long term.

Cautionary tales

A key risk – and one that pushes bubbles to their ultimate extreme – is selling early and then getting back in.

It’s incredibly painful watching things you’ve held and sold go up and up and up.

That’s why Sir Isaac Newton lost £20,000 in the South Sea Bubble in 1720, having sensibly sold his holdings a few months earlier before buying back in because of what we modern people might call “FOMO” (fear of missing out).

This year is set up to be an absolutely brilliant one for renewable investors. But for me, in times like these, you need a guide.

James is working hard every day to make sure the companies he chooses are the future leaders of the hydrogen industry.

These aren’t short-term plays, these are the next big players in the energy markets of the future. And that future is much closer than it has ever been. (I realise that’s true by definition – but you know what I mean.)

Just look at Tokyo, where this summer, the Olympic torch will be hydrogen powered. Or Aberdeen, the home of oil, where hydrogen is transporting people around by powering the city’s buses. I can’t emphasise enough that getting on board with James ASAP is the opportunity of a lifetime.

Remember, their potential is both enormous and long term, and James Allen will be here to guide you through the next years as the take-off of these incredible clean tech companies continue.

I remain, as ever, your optimistic and opportunistic renewables enthusiast,

Kit Winder
Editor, Exponential Energy Fortunes

PS Feel free to send any thoughts or responses to kit@southbankresearch.com.

Category: Technology

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