It's starting to feel a lot like....March 2000
Its March 2000, I'm 24 years old, I work in a Call Centre for a massive energy provider. I'd been there for just over a year after leaving the best job I ever had repairing cameras for a little shop with just 4 employees in my home town. Digital cameras had been invented and I could see the end in sight, cameras would be all digital within 5 years. Mechanical things can be repaired, digital things get replaced.
It was time to find a new career.
I once had a customer bring her camera into the shop and ask me if I could fix it. I spent a few moments looking at her camera to identify the fault and then I announced;
"I can certainly fix it ma'am. Did you by any chance recently go on holiday or go to a beach"
"Yes, how do you know?" she replied.
"The problem with your camera is there is a grain of send in the gearbox, it needs stripping down and removing and the camera will be fine after that. It will cost 48 pounds plus VAT and I can have it ready for you by this time tomorrow"
Now £56.40 / $73.32 / R11,000 was a lot of money in those days (to give you an idea, when I started that job as a camera technician in 1996, I was paid £65 / $85 / R1,250 per week. The lady looked surprised and said:
"How can you charge that much to remove a grain of sand?"
My answer was the same answer I gave to everyone who complained about the price of repairing a camera; "Ma'am, you're not paying me to remove the grain of sand, you're paying me for the 4 years it took for me to know that there's a grain of sand, where it is and how to remove it".
She left the camera, I fixed it, she paid. They always paid and they always recommended us to somebody else. We weren't the cheapest, but we were the best, we had mastered our craft.
But I was young and I would outlive the skills I had gained, it was time to pivot.
When I arrived at the giant corporate energy company it couldn't be further from everything I knew from my previous job. I was one of 4000 call centre agents, and we had strict rules around attendance and timekeeping, we had cards we had to swipe when we left the call centre floor and we had to dial a code into our phone when we went to the toilet. We needed to take 16 calls per hour and every week some recordings of my calls would get assessed against a quality tick sheet to make sure I'd shown empathy, apologised if necessary, said the customers name 3 times during the call and ended the call with thanking the customer for calling us.
It was industrialised corporate Britain at it's best and I didn't have to have knowledge or skills as such, I just had to comply, do what I was told, do it quickly and hit my targets.
And do you know what? It paid better than the camera shop where I was respected as an artisan and had honed my craft for 5 years. My eyes were opened. It was at that moment I learned that you can hate the player or you can hate the game. And while you're hating the game you learn to do it to the best of your ability.
You're probably at this point wondering why I'm telling you this and probably willing me to get to the point so I will.
In March 2000, I learned that at that point in time, quality was way less valuable than quantity, certainly in the UK. Corporate greed was good and the stack it high, sell it cheap, disposable era was here. The digital revolution was upon us and it was survival of the fittest.
Any company that had a new tech idea seemed to rise out of obscurity and be worth millions if not billions of dollars almost overnight, for investors, it felt like you couldn't lose, everything you invested in went up, no one was selling because they were too scared they'd miss out in this once in a lifetime opportunity.
Between 1995 and 2000, the NASDAQ (the main tech based US stock market) had risen a champagne popping 400% and shot companies like Lycos, Broadcast.com and The Learning Company to stratospheric market valuations.
Then on 10th March 2000, the Nasdaq hit it's peak of 5,048
By october 9th 2002, the Nasdaq had fallen by 78% to it's trough at 1,114
And what of those rising stars?
Lycos - Was bought in May 2000 by Terra Networks for $12.5bn - It was then sold in 2004 for $95m
Broacast.com - Sold to Yahoo for $5.9bn - The site is now defunct
The Learning Company - Was sold to Mattel in 1999 for $3.5bn - A year later they sold it for $27m
I chose these examples on purpose because they all have one thing in common, they were sold to massive corporations for huge sums before they failed, making their owners unbelievably rich. If you've ever watched the american TV show Shark Tank, Mark Cuban, who is one of the Shark Investors was one of a pair of techies who started , and subsequently sold Broadcast.com to Yahoo. Mark Cuban is now worth $4.2bn in his own right.
Whilst all of these entrepreneurs made vast amounts of cash selling their businesses and fair play to them, as the companies they created all failed, it would be fair to say the businesses were not all they were cracked up to be? In fact it would be a possible hypothesis that they weren't worth anywhere near what the big corporates paid for them? That can be evidenced that the three examples cost a total of $21,900,000,000 and sold in less than 4 years for just $122,000,000. Yes, there's three zeros missing and it's not the decimal point!
Now why does that matter to you?
Who owns big corporates? ETFs, Pensions, Retirement Annuities, Index Trackers and Retail Investors. You and me, the shareholders.
What happens when a corporate loses billions because it bought companies that were less valuable. It in turn becomes less valuable so our shares become less valuable, we pick up the cost.
In that example, the big corporates may have lost $21,778,000,000 but that loss ultimately gets shared out as a loss for all shareholders. You and me.
So why this topic, and why now? Because it feels a bit like March 2000 in February 2021.
To demonstrate my point, lets take my old favourite Tesla (easy target I know, but wait for it).
Tesla plans to sell 1 million cars in 2021, a number that is widely considered overly ambitious, but Elon managed to come up with a rocket delivery service so I'll go with it. Let's say the average selling price for a Tesla is around £50,000. Simple math says that if they achieve the target, revenue would then be around $50bn. Impressive to say the least. revenue was $20.8bn in 2020 so that's doubling it but fair enough, that would be great for the shares. I'll hold.
The current Market Capitalisation ( the total value of its total issued shares) of Tesla Inc is $752bn.
So if it reaches its target of doubling it's revenue in 2021. It's market cap TODAY is still more than the equivalent of 15 years of that revenue.
Not convinced? OK, challenge accepted. let's look at it's Price to Earnings ratio. That is it's annual earnings divided by the total number of shares issued versus the price per share.
Tesla's PE ratio is 1,517. That means, that it would need to increase its earnings by 1,517 times to make it's shares representative of 1 year. Or looking at it the other way, Tesla is valued at 1517 times it's yearly earnings.
Let me just drive that home one last time, Apple a company also subjected to much hype but that makes a lot of its money also selling tangible things has a PE ratio of around 36. In my opinion, 36 is still a bit punchy but it's a lot less scary than 1,517!
If I started a lemonade stand and made $1000 in a year, how much would you buy the lemonade stand off me for. $1,000? $2,000, $5,000?
How about I tell you that whilst I might have only made $1,000 this year, my lemonade is better than everyone else's and will be the best selling lemonade for a few years. Would you now pay me$7,000, $8,000, how about £10,000?
Well let me tell you, you can buy my lemonade stand for $1,517,000. It's a deal, it's a steal, it's the sale of the century! When can I expect your cheque?
Hopefully I've made my point but the moral of this story is to look around you. How many companies do you see who have become mega stars but haven't actually made any money yet?
I invested in AirBNB 2 weeks ago, they have a Market Capitalisation $109bn and don't make any profit!
I'm certainly not qualified to suggest we're heading for a stock market crash and as a proponent of FIRE investing, it's irrelevant to me anyway as I won't be selling if there is, I'll be sitting it out whilst freaking out most probably. But it feels awfully like it did in March 2020 when everyone thought you couldn't lose in the stock market and then the people who would be most hurt by it were the ones that lost money.
I've been following the news for the last week about the group of Reddit investors who have been buying up shares in GameStop, which from what I can gather is a slowly dying high-street video game retailer who is being crushed slowly by online sellers like Amazon. They remind me a bit of March 2000 when it \was video rental store Blockbusters in a similar position.
In case you missed, it. it's pretty simple: GameStop is dying slowly so it's share price has been dropping the last few years. When it's expected that a share price off a big organisation will fall, Hedge Funds take "Short" position in the company which means they "borrow" some GameStop stock and sell it immediately at today's share price. They pay interest on the shares they borrow until the share price drops and they buy back the GameStop shares at a lower price and repay the loan. They pocket the difference between the price they sold for and the price they bought for. Short selling is considered a fairly mercenary act as you're essentially willing the company to fail to make money, not a very nice thing to do.
Well the anarchist investors over at Reddit agree that this is a pretty heinous thing to do so they all started buying shares in GameStop which in turn pushes the price up. The Hedge Funds can only hang on so long if the price is rising before they have to get out and cut their losses as the interest on their "loaned shares" goes up with the price. If the Reddit team can keep the price going up and hold it up high long enough, the Hedge Funds need to sell out and they take the massive loss and the Redditors get to bank their Robin Hood steal from the rich to give to the poor gains. It would appear that in this scenario they are the poor although I see many of them have decided to use some of their profit to go buy a games console from GameStop and donate it to charity thus paying back GameStop and doing some good in the process.
I have mixed feelings about this as I suspect the core Redditors plan to do it exactly as I've described above and in their eyes the only victim is the Hedge Funds and they deserve it right? I am a abit of an anarchist at heart but I also understand that every action has a reaction. My 2021 mantra is "Don't start no Sh!t, there ain't gonna be no Sh!t" which works tow-fold for me, the first being if you don't get on with something it will never happen but for this scenario it's more about if you're going to start trouble, you're going to get trouble.
Well what about all the people how jump on the bandwagon and invest money they can't afford to lose into a company who is unfortunately but undisputedly dying? What happens when the temptation of greed becomes too much and people start selling out and the whole house of cards collapses? What about the Hedge Funds? Although they're generally viewed as faily evil beings, surely institutions and pensions invest through them and we're invested in the institutions and pensions so do we indirectly lose in something we had no knowledge of?
And finally if this level of market manipulation is legal, where does it stop? Is the whole integrity of the stock market in question and what happens if people start selling all of their shares out of fear?
I tell you where it all ends up, March 2000. Let's hope I'm wrong.
Until next time, keep living.