“As Ben Graham said: ‘In the short-run, the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long-run, the market is a weighing machine.'” – Warren Buffett (1993 Berkshire Hathaway Letter)
Over the last year we’ve seen a rolling series of manias in markets like never before. Irrational exuberance has been on full display, driving asset prices in many securities far beyond any notion of their fundamental value.
In the midst of a mania, it can seem as if the “voting machine” is all that will ever matter, and you can safely throw caution to the wind. But the “weighing machine” is always lurking in the background. Eventually, a security’s underlying value matters, you just don’t know when…
1) The Litecoin Mania
A year ago, I wrote about the Litecoin Investment Trust ($LTCN), which was trading at $500 at the time.
Why was that notable? Because the underlying holdings of Litecoin in the trust were worth only $8.37, meaning investors were paying a 5,874% premium to NAV.
Fast forward to today and the trust’s holdings in Litecoin have increased 127% (to $18.97/share).
Did investors in the Litecoin trust receive similar gains?
No. They’ve lost 96%, as the market price of the trust eventually came crashing down to meet its fair value. In a remarkable reversal from a year ago, the trust now trades at $18.52, slightly below the value of its underlying assets ($18.97).
2) The Musk Tweet Mania
In January, I wrote about Signal Advance ($SIGL), a wild case of mistaken identity after a tweet by Elon Musk…
Speculators bought Signal Advance stock, assuming it was the private messaging app company Musk referenced in his tweet (spoiler: it was not). This quickly drove its share price up 118x with its market cap hitting peak of $739 million (from $6 million before the tweet).
The stock came crashing down soon thereafter, but it took a full 10 months before moving back below the price it traded at before the Musk tweet. Today it’s down over 99% from its January high, with a market value of $5 million.
3) The SPAC Mania
Since then, while the broad market has trended higher, the SPAC ETF ($SPAK) is down over 30% from its high. Many popular SPAC names are down 50% or more.
The large premiums that SPACs were trading at early in the year have evaporated, with the median SPAC now trading at a discount…
4) The Meme Stock Mania
Piling into “meme stocks” became the Roblox for adults, forever changing the dynamics of markets.
While the ride up for these stocks was filled with endless FOMO-inducing stories of riches made, there’s been little coverage of the subsequent declines.
Almost without exception, every parabolic meme stock advance in the past year has reversed course, leaving those who chased near the top with massive losses.
A few examples…
What about the king and queen of meme stocks, GameStop ($GME) and AMC ($AMC)?
Both are down over 60% from their year-to-date highs, and both just crossed below their respective 200-day moving averages for the first time since the meme mania began.
5) The Squid Game Mania
In the early morning hours of November 1st, we saw a boom and bust cycle take place in the recently invented Squid Game crypto coin (no financial relationship to the hit Netflix show) that was hard to fathom.
Here’s how it played out (price of Squid Game per coin):
- 1:35am: $38.19
- 2:35am: $89.91
- 3:35am: $93.64
- 4:35am: $434.70
- 5:35am: $2,856.65
- 5:40am: $0.0007926
At a reported supply of roughly 720 million Squid Game coins, this would have valued the crypto asset at over $2 trillion at 5:35am and less than $1 million just a few minutes later.
The Other Side of a Mania
On the other side of every mania lies the reality of the weighing machine. It was always there, lurking in the background, but in the midst of a parabolic, sentiment-driven advance, nothing could seem more irrelevant.
Over the past year we’ve seen this story play out in one mania after another. And as long as human beings and their emotions are involved in markets, we’ll see plenty more in the years to come.
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.