I’m always on the lookout for sports analysis that can be applied to investing, and given that the AI rally is still going strong, I wanted to share one that is particularly apt for those chasing bubble stocks.
I recently came across tennis great Roger Federer’s fantastic 2024 commencement speech at Dartmouth. I’ve quoted a segment below that I thought was especially applicable to investing.
“In tennis, perfection is impossible... In the 1,526 singles matches I played in my career, I won almost 80% of those matches... Now, I have a question for all of you... What percentage of the POINTS do you think I won in those matches?
“Only 54%.
“In other words, even top-ranked tennis players win barely more than half of the points they play. When you lose every second point, on average, you learn not to dwell on every shot.”
My takeaway on the above passage, which is applicable to investing, is that not every stock you purchase will work out. This may be obvious, but how you react to losses is what is important in determining success over the long haul.
Specifically, minimize losses, keep your perspective, and then move on to new ideas.
Especially, avoid making oversized bets and resist the temptation to chase overvalued “bubble” stocks that can cause significant damage to your portfolio.
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Taking partial profits when a stock doubles and having a 20% trailing stop loss in place is critical in avoiding the devastating losses that can come with stock bubble blowups.
Financial history is full of these “mania” stocks. Here are just two examples:
The first one goes way back to the Dutch Republic – now the Netherlands – which had its day in the sun as a great trading and financial empire in the mid-17th century.
Tulip bulbs imported from the Ottoman Empire flowered in the springtime, and then the bulb was dug up and stored through the winter. Now, one of the innovations the Dutch came up with was futures markets, allowing investors to bet on future prices of a variety of things, including tulip bulbs. Different tulips had different prices, and the rare, beautiful, and highly prized Semper Augustus tulip bulbs were priced accordingly.
During the height of “tulip mania,” a single bulb was worth enough to purchase a nice townhome in Amsterdam. Many crazed investors used debt to make bets as prices soared. Then suddenly, in February 1637, there were no buyers and prices collapsed.
A more recent bubble that I followed as a rookie stockbroker was in Japan. Nvidia (NVDA) may be the market’s tech darling these days, but a few decades ago, it was Nippon Telegraph and Telephone (NTTYY), better known as NTT.
NTT began as a government-backed company but wasn’t the typical monopoly-like utility. Roughly three decades before the dot.com era, it launched futuristic devices such as a video phone that linked Tokyo to Osaka and even a wireless handset. This was when Japan’s economy and stock market were the envy of the world.
In the 1980s, NTT was privatized, and its stock took off like a rocket. With an IPO priced at around $8,300 per share, it raised $15.2 billion. Later rounds brought the total to $38 billion. You can triple these numbers to get today’s dollars.
NTT’s valuation ballooned to 200x earnings – and the company was worth more than the West Germany and Hong Kong stock markets combined.
NTT peaked in 1989 along with Japan’s Nikkei index. Three years later, NTT’s share price sank 85% and still traded at 50x earnings, and even now, the stock is 60% below its 1980s high. Ouch.
One final point. When these bubbles collapse, be open about buying the stock after the dust settles.
Some do bounce back. But do your homework first!
One example is China’s Luckin Coffee (LKNCY), which has been a Cabot Explorer recommendation that has soared, collapsed, and is now back in the Explorer portfolio.
You can make money with bubble stocks as long as you have a disciplined strategy.
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