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Q1 2021: Speculation: A Game Of Musical Chairs

Updated: Sep 27, 2022

As we near the end of the first quarter of 2021, the beat goes on for the stock market. Through today (March 25th) the stock market, as measured by the S&P 500 Index, is up over 3.5%. This continues the undeterred rise since the market bottomed on March 16th of last year. Quite the ride for seasoned market participants and the newbies to the stock market.

The economic story of the past twelve months has been well documented. A pandemic developed, sending the world economies into lock down, ultimately forcing the hand of authorities to unleash historic levels of capital relief to the masses.

These trillions of dollars have kept us afloat, probably more so than required, as we await with giddy optimism a return to normalcy. A clear sign that the level of relief has exceeded its need, is what we are seeing in some corners of the investment markets. When there is too much money chasing too few good ideas, guess what you end up with… more ideas! Unfortunately, the balance shifts towards bad ideas versus good ideas.

Excess money will not sit quietly, especially in a historically low interest rate environment. It will chase these less-than-ideal opportunities with the same motive as any other investment… make money. And on the flip side, those responsible for presenting these new ideas know there is too much money out there and will race to prosper while the market is hot. This dynamic dials up the speculative aspect of investing. Speculation is always present in the stock market, but even more so in easy money times like we see today.

We define speculation as the act of committing money to an investment with no justifiable expected outcome. You are hoping someone else will pay you more for it. Many times, these investments are the result of following the herd into the investment do jour. In 2021, look no further than the SPAC.

A SPAC (Special Purpose Acquisition Corp) raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company. Subsequently, an operating company can merge with (or be acquired by) the publicly traded SPAC and become a listed company in lieu of executing its own IPO. While SPACs have been around for a while, they have recently gained acceptance as an easier way to take companies public… maybe too easy.

In 2019, blank-check companies (another term for a SPAC) raised over $13 billion. At that moment, it was an all-time high. As of this writing, blank-check companies have raised more than $90 billion this year. All told there are 430 of these companies seeking to acquire either another public company or more likely a private enterprise.

There is plenty of skepticism that there are 400+ legit companies out there ready to be bought out and taken public via a SPAC. You can count yours truly in this camp. In fact, I think the SPAC creators are sensing this as well. This might be the driving force behind the latest SPAC development… celebrity athletes.

That’s right, last month, both MLB All-Star Alex Rodriguez and former NFL player Colin Kaepernick announced plans for their own SPACs. NBA Hall of Famer Shaquille O’Neal and music mogul Jay-Z are among the other celebrities who have SPAC connections. Maybe the SPAC founders are feeling they need a little something extra to gain investor interest amongst the increasingly crowded landscape?

If the level and intensity that capital is being raised via the SPAC sounds all too familiar, your memory serves you well. A quarter of a century ago we witnessed the great phenomenon known as the Dot Com Era. For a period of nearly five years the number of companies coming public the traditional way, via an IPO, was staggering. What was even crazier was the first day pop the stocks received. On average over 50%!

If you remember that time period, then there is no need to rehash how it ended. For those who have blocked it out or are too young to have experienced it, let’s just say of the hundreds of companies that came public during this period, there are only a handful that you would know today (i.e., Amazon, Ebay, Qualcomm). I know it’s hard to believe, but with its beloved sock puppet but little in sales (not to mention profits) did not make it (in its original form).

The budding speculative craze today is no different than what we saw back then. For the company, they want to capitalize on the pent-up demand demonstrated by investors (speculators). And these folks are looking to get in on the new issues with the hopes someone else will pay them more for it. Everyone involved is looking to make quick and easy money. Unfortunately, there is nothing quick nor easy to achieve long-term investment success.

As much as I am a Shaq fan, I’m not interested in joining this speculative dance. As we all know when speculating (hoping someone else pays you more for your investment), there is a good chance the music will stop (when hope is lost amongst the masses), and I have no interest in being the guy left without a chair. We’ll stick to our boring long-term approach that is based on a little more than hope.


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