As the state of euphoria that gripped stock markets in the second half of 2020 and the first quarter of 2021 has started to subside, it is becoming evident which companies were overvalued. As Warren Buffett (Trades, Portfolio) might put it, now the tide has gone out, we can see who has been swimming naked.
SPAC boom
The special purpose acquisition company (SPAC) boom is already deflating.
Bill Ackman (Trades, Portfolio)'s SPAC is probably the most high-profile disaster so far. Pershing Square Tontine Holdings Ltd (PSTH, Financial) is down nearly 25% since the beginning of the year, and almost 40% from its all-time high of $33 reached in the middle of February. After Ackman's plans to buy a 10% stake in Universal Music Group began to falter, investors have been selling.
Another example is Appharvest Inc (APPH, Financial). Shares in this former SPAC are off 45% year-to-date. The stock recently slumped below its $10 offer price after substantially revising down its revenue projections for 2021.
There are plenty of other examples of the stock market hangover. Nikola Corporation (NKLA, Financial) is off 85% from its all-time high reached in June 2020 and Workhorse (WKHS, Financial) has slumped 75% since the beginning of February.
Then there's the regulatory clampdown that has been taking place in China. Since the middle of October last year, this clampdown has cut 38% from Alibaba's (BABA, Financial) valuation. This is just one of many Chinese equities that have fallen following the introduction of new regulatory measures.
Follow the recent developments in the market, some investors may be reconsidering their allocations to specific equities. Unfortunately, many companies have not lived up to expectations.
The trader's approach to investing
The best approach for investors who may now be sitting on significant losses after these investments failed to meet expectations could be to sell up and move on, in my opinion.
The world is currently going through a tremendous period of economic and technological change. There are bound to be winners and losers from these changes. The best way to invest in companies that change the world is to get in early.
However, it is virtually impossible to pick tomorrow's winners today. There will always be an element of speculation involved in trying to guess which companies' technologies will succeed and which will fail to get off the drawing board.
Trying to draw a line between investing and speculation is difficult. In theory, investing involves buying a stream of cash flows between now and judgment day. That's easy enough to define, but it overlooks the fact that many companies start from nothing, and in the early years, it is impossible to forecast their cash flows for more than a few months.
This implies anyone who invests in early-stage businesses is a speculator, putting them in the same bracket as Wall Street traders. I do not think that is a fair label considering the level of due diligence many early-stage investors complete, but there is one thing we can learn from speculators when investing in early-stage and high-growth businesses and that is risk control.
A successful speculator or trader knows how to control risk, cut their losses and run profits. It is the same with early-stage businesses.
One cannot be successful in the long-term gambling everything on just one or two ideas. Further, one must realize that many growth companies can and do stumble, and it is usually better to get out as soon as something goes wrong (if you can) rather than wait and see what happens next. Investors who lose 50% can still fight another day. bit investors who lose 100% will struggle to come back.
This implies that investors in the above companies who may regret their initial decisions may be better off selling up and moving on rather than waiting around to see what happens next. There are always new companies to buy. One does not have to stick with the same names simply because they didn't live up to expectations.
