What Can Elvis Teach Us About Investing?
What Can Elvis Teach Us About Investing?
How Greed Leads Investors into the Trap of Return Extrapolation, Exposing The Hidden Risks of Predicting Future Returns.
An Inspirational Article
This morning as I was having my coffee and reading Medium, I discovered an intriguing yet great story about Ethan Ginsberg, and his goal of earning $1,417.21 on medium next month. I found the article to be really funny for two reasons: first, it made me feel as though he wasn’t going to be all that disappointed if the number didn’t materialize, as it was written almost as if he was hoping it would. Secondly, it reminded me of a story that happened about 23 years ago, during the height of the technology bubble, which was hilarious at the time and still somewhat relevant today. So THANK YOU Ethan for the inspiration.
Young and Well….Lots To Learn
In the year 2000, I was a fresh-faced, 26-year-old, green financial advisor, eager to absorb every bit of wisdom the market had to offer. This involved me going to a lot of presentations and absorbing all I could about investing from the managers at the time. One of those managers happened to be Brandes Investment Partners in conjunction with AGF Investments. I gained a lesson that still resonates today. Back then, Brandes managed funds for AGF, they were one of the premiere value investors of the day, led by Charles Brandes, someone I consider a legend in the investing world.
The Dot Com Bubble Was Insane
It was a wild ride to be a young advisor in the thick of the 2000 dot-com bubble mania. It was a time when investors were enthralled with the seemingly limitless potential of internet stocks such as Pets.com, AOL, Nortel Networks, Palm, Yahoo Cisco, and Wilan. The only thing that saved me from getting crushed along with everyone else in the mania, was the calm, cool and collected demeanor of my mentor Jack, a very successful advisor and friend still in the business to this day. Now that I think about it, he got his Canadian Securities Course in 1973–51 years ago this year! But I digress!!!
At the time, there was a fundamental gap between the underlying skyrocketing stock prices: many of these companies trading at tremendous multiples without producing enough revenue to support their values. I can distinctly remember Research in Motion trading at 2000 times earnings! A multiple I have yet to have seen eclipsed for a larger company ( If you have seen higher multiples let me know in a response ). As investors chased the elusive dreams of vast riches, optimism reached a fever pitch. I even remember a barber, William Flynn who had made a fortune investing in the dot com era being featured on CNBC, as a story on how anyone can invest in tech and become rich. But as history would later demonstrate, the enthusiasm was short-lived, and the dot-com bubble crash that followed provided a sobering reminder of the risks associated with extrapolating profits based on speculative zeal rather than solid fundamentals.
The Elvis Presentation
That reminds me of the Elvis Presentation. Projecting future results with the presumption that existing patterns will continue or worsen is known as extrapolation. Extrapolation is a risky activity, especially when it comes to making investing judgments because reality frequently diverges from such extreme estimates. This idea is eloquently demonstrated by the following example: founded more on speculative enthusiasm than solid fundamentals.
And to illustrate the dangers of extrapolation at the time, Brandes presented an ingenious slide, one that showcases just how rediculous extrapolation can be, and one that resonates with me today, an extrapolation on the growth rates OF ELVIS IMPERSONATORS:
- In 1977, at the time of Elvis Presley’s death, there were 170 Elvis impersonators worldwide.
- In 2000, there were 85,000 Elvis impersonators.
- At this rate of growth, statisticians at the time predicted that by 2019, Elvis impersonators would make up 1/3 of the world’s population, of 7,764,951,032.
- If you want to see the actual site, they are still predicting that by 2043, the human population will all be Elvis impersonators.
This example underscores the folly of extrapolation; while it may seem logical to project trends into the future, the real world rarely conforms to such simplistic assumptions. In the context of investing, falling prey to extrapolation during bull markets can lead investors to overestimate potential returns and underestimate the risks, potentially jeopardizing their financial well-being.
Similarities Today With AI
Though the earnings potential of AI companies differs significantly, the current interest with AI equities is strikingly similar to the tech boom of 2000. While AI companies do make enormous profits, it is risky to extrapolate their success from the achievements of a small number of successful individuals — often referred to as the “magnificent seven” or the “AI Five”. Like with the dot-com bubble, investors tend to see these phenomenal profits as forever stable, ignoring the risks and uncertainties that come with rapid technical improvements. History may not repeat itself in the marketplace, but it certainly rhymes, as they say. Similar to how the euphoria of 2000 gave way to a sobering reality check, AI stocks could be heading toward a similar outcome. Whether this zeal results in long-term progress or a sobering correction that repeats historical lessons will only become clear with time.
In The End
The extrapolation cautionary tale is a timeless warning of the dangers associated with leaning too much on historical trends to forecast future events. Projecting present trajectories into eternity can be alluring, whether in finance or elsewhere, but doing so can result in erroneous assumptions and poor decision-making. We may handle the intricacies of an uncertain environment with greater insight and caution if we acknowledge the limitations of extrapolation and adopt a more nuanced approach to predicting. We must learn from the past and avoid making hasty assumptions by keeping in mind that the future is molded by both the unanticipated shifts and turns that lie ahead as well as by what has already happened.
Did you know that navigating the uncertainties of the markets and your finances is generally smoother with the support of an investment advisor or portfolio manager? Studies consistently reveal that individuals who work with investment advisors and portfolio managers tend to have up to three times higher net worth on average, but that’s not all, there’s a significant impact on overall well-being, with those who seek professional advice exhibiting higher levels of happiness and lower anxiety. Having a guiding hand through the financial landscape proves beneficial not only in terms of monetary outcomes but also in fostering a sense of security and contentment, making the challenges of an uncertain year more manageable with professional assistance.
Look No Further, I am A Fiduciary..
However, unraveling the mystery of locating a trustworthy fiduciary advisor proves to be a perplexing task for many. A quick look at common Google searches related to the topic unveils a sense of urgency and a quest for guidance. Phrases like “Fiduciary financial advisors near me,” “Best fiduciary financial advisor,” and “Financial investment advisors near me” are entered into search engines hundreds of times daily, showcasing the widespread need for assistance in finding reliable fiduciary guidance.
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Joe Macek, Investment Advisor, iA Private Wealth
Joe Macek is a Portfolio Manager with iA Private Wealth. iA Private Wealth Inc. is a member of the Canadian Investor…
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
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