September 2020
In case you missed it …
Disruptive Innovation Investing in 2020
Exploiting technology stock volatility is more important than ever …
Apple, Tesla, Amazon, Nvidia, Netflix, Facebook … All of these disruptive innovation companies have fundamentally changed their industries, swept away the competition, and now dominate their respective business niche. Even in the midst of a pandemic, these companies have not only flourished, but they have also extended their lead over the competition. I firmly continue to believe these same innovation names will continue to deliver superior returns over the long-term.
However, if you are currently a shareholder of disruptive innovation stocks, you’ve probably been shocked by recent price movements — both on the way up and the way down. Like many investors, you might be struggling with the decision of whether or not to remain invested through this correction.
Whether you’re a long-time investor in disruptive innovation stocks or new to these volatile investments, rather than relying on a buy-and-hold strategy, or on a market timing strategy, I’d like to offer you a third option — an option aimed at maximizing returns and minimizing portfolio standard deviation by exploiting large price movements.
In this article;
- Innovation stocks are volatile because they are hard to price using traditional pricing methodologies
- The pros and cons of using an asset rebalancing strategy when investing in disruptive innovation
- How to capture extraordinary gains and capitalize on unusual under-performance by demonstrating how you can set up your own rebalancing strategy — using many of the same techniques I used for a professional fin-tech platform 15 years ago.
3 Reasons This Stock Market Correction Isn’t Over
The Red Hot NASDAQ Bubble Shifts Out Of Overdrive
Only a week ago, the US Technology sector somehow managed to be valued at more than $9 trillion, making the US tech sector more valuable than all European stocks combined. Tesla (currently an electric car company with interesting long-term potential) somehow became the seventh-largest company in the US after announcing a five-to-one stock split. Stay-at-home stocks like Overstock.com went parabolic mainly due to pure speculation and insane predictions by analysts.
Late last week and continuing this week, technology stocks have corrected sharply lower. Some news contributors think this is a normal correction, others believe this might be the start of a more prolonged, long-overdue selloff in technology.
Today, I will discuss 3 reasons why the stock market correction may be far from over.
- The Softbank fallout
- The overestimation of the work-from-home story
- The overestimation of a speedy pandemic recovery
How Strong Will Technology Stocks Finish 2020?
3 signs point toward possible weakness
The NASDAQ has suffered a challenging couple of weeks, followed by a decent relief rally — some analysts think the worst of the correction is over. In fact, some argue the recent increase in corporate mergers may be a sign the stock market is still too cheap.
But are stocks too cheap? Not likely — I think the recent cash raise at Tesla and the even more recent Nvidia announcement (a proposed cash, stock, and future earnings deal to buy Arm from Softbank) are not signs of strength in the market. Rather they could be recognition companies recognize the wild over-valuation of their own stock. Leadership at these companies are smartly leveraging inflated valuations to further strengthen balance sheets with cash and assets before stock prices return back to earth.
Strengthening balance sheets in the current euphoric environment makes a lot of sense. The recent and sudden, sharp drop in large-cap tech stocks might finally be a sign that three major hurdles for the stock market are finally coming into focus.
In this article I will try to clarify three points of possible future market weakness by discussing;
- The unprecedented rise of risky trading strategies;
- How mask-wearing and social distancing could remain the new normal until the end of 2021;
- Why we may soon see bankruptcy rates rivaling the Great Recession.
Big Problem — 52% Of Young Adults Now Live With Their Parents
Why are we burdening young adults with an economic recession they didn’t cause?
I don’t think there are too many young adults dreaming of putting their lives on hold by being forced into moving back home. And as much as parents love their adult children, I don’t think there are too many parents excited by the idea of unexpectedly having to house and financially support their adult children, in some cases, for years. Yet, that is exactly what Pew Research says is happening today.
In a recently released research article, Pew Research estimates the majority of young adults (between 18 and 30 years old) now live at home with mom and dad. According to Pew, we haven’t seen numbers this bad since the 1940s. In fact, the only other time in history more young adults have lived at home with their parents was during the Great Depression.
On the surface, it might not sound like such a big deal, but vast numbers of adult youth moving back home to live with mom and dad is much more than a temporary inconvenience. There are multiple examples from history that demonstrate large numbers of young adults moving back in with mom and dad can damage the save-spend psychology of that generation for years and even decades.
Forcing young adults to financially shoulder a large share of an economic recession they didn’t cause, isn’t just unfair — it can cause unintended, long-term damage to an economy. If hope is taken away from young people, they stop dreaming. If young people stop dreaming, they stop trying. If young people stop trying, they stop spending.
- Japan’s post-bubble economic recession
- The war generation, post the Great Depression
- Ideas to consider as the current economic recession grinds on
Tesla’s Valuation Is Teetering
Investors have bet the farm on 3 shaky assumptions
Even after Elon Musk went on the record in May to say Tesla’s valuation was too high (approximately $150 per share after a 5 to 1 stock split — August 28th, 2020) investors went on to bid Tesla up to dizzying heights. At one point only weeks ago, Tesla was the 7th most valuable company in the US, even surpassing the value of Walmart.
Just last week Musk reiterated his feelings about Tesla’s valuation;
“I’ve gone on record already saying the stock prices have been high, and that was well before the current level. But also if you ask me, do I think if Tesla will be worth more than this in five years? I think the answer is yes.” — Elon Musk, September, 2020
Let me translate — Musk thinks it will take 5 years of rapid growth for Tesla’s fundamentals to catch up to its current valuation.
What’s holding up Tesla’s sky-high valuation? Why are investors still chasing a stock Musk himself believes might be 3x overvalued? Rightly or wrongly, investors appear to be basing their hopes and dreams on three shaky assumptions —
- Tesla’s inclusion in the S&P 500 index,
- Tesla’s new ‘million-mile’ battery,
- and Telsa hitting its self-imposed target of 500,000 cars by the end of 2020.
