Written by Tom Stanley, Investment Adviser, 26 November 2021
Here we are rolling out of another NZ Cup Week and into the festive season. Despite NZ’s Response to the COVID Delta strain, the horses still ran, and there was plenty time for a punt – I had a dabble. I sourced the best tips I could and was introduced to the TAB app by my colleagues, but my punting performance (similar to my golf game) was sub-par – This Cup Day experience alongside buoyant financial markets, the ‘digital art’ buzz, and current FOMO (Fear Of Missing Out) in the local housing market spurred on this month’s comment – providing a framework on ‘Investing’, ‘Speculating’ and ‘Gambling’.
David Stein does a great job of breaking out and defining ‘investment’, ‘speculation’ and ‘gambling’ – the differences are subtle, but profound.
- INVESTMENT. Opportunities that have a greater likelihood of being profitable.
- SPECULATION. Opportunities where the investment outcome is highly uncertain.
- GAMBLING. Opportunities that have upside, but carry a greater likelihood of losing money.
On Investment
At Amicus, Investments are our wheelhouse. We focus on identifying and working with the best funds and professional fund managers available to New Zealand investors. We expect the fund managers we work with to act in prudent and responsible ways seeking out investments with a greater likelihood of being profitable and develop our clients investment strategies accordingly – But, now more than ever, maintaining this investment discipline is harder than ever… why?
On Speculation
Joe Calhoun of Alambra Investments notes that there has recently been talk about international fund managers who are avoiding Tesla stock are being punished. The managers can’t keep up with the broader US stock market without owning Tesla but they don’t feel they can justify owning the stock from a fundamental standpoint and investors chasing returns are cashing out.
Why would fund managers (professional INVESTORS) take such a stand against holding Tesla?
Because what Tesla would have to accomplish over the next decade to justify today’s stock price borders on the ludicrous. Tesla’s recent rally drove a sky high $USD 1.2 trillion valuation (8.3x New Zealand’s annual GDP) and implies that Tesla would own 60%+ of the entire global passenger electric vehicle market and be more profitable than Apple by 2030 – Tesla would have to dominate the global automobile industry to such a degree that most, if not all, of the rest of the industry would be bankrupt.
Joe continues with… ‘Tesla is but one example of the degree of speculation in today’s markets. How about Rivian (another new electric vehicle maker) that recently went public and now has a valuation of $USD 115 billion despite not having sold a single car? Or QuantumScape, a research stage battery company worth $USD 15 billion and no revenue, while Panasonic has sales of $USD 67 billion (including the batteries that move most of Tesla’s cars) and a value of less than $USD 30 billion? Digital art? What about this “art” that recently sold for $USD 3.4 million? Cryptocurrencies? Dogecoin, meant as a joke, has a total value of $40 billion! No one is buying these things because they have some intrinsic value. They are only buying them because they think someone will come along and pay them more than they paid – this is the idea of ‘the greater fool theory’. The supply of greater fools is finite or at least I think so, but we obviously haven’t found the limit yet.’
The problem with all this speculation is that it starts to tempt the prudent investor into reckless behaviour.
On Gambling:
My experience during cup week is typical of ‘gambling’ and needs less comment. That said, gambles are not confined to betting on sport or the pokies, they can be any investment with a negative expected return – ‘Lotto’, ‘scratchies’ and some options strategies come to mind, and should be undertaken only to be entertained.
Our Framework:
Despite all of the above, at Amicus we view speculation as healthy, especially when paired with education… and gambling can be fun. So how can we take a chance, have fun and invest while avoiding ‘gambling the milk money’?
Here are our thoughts:
- INVESTMENT. More than 90% of your portfolio and research time should be focused on investments with a positive expected pay off – think KiwiSaver, Managed funds and Property.
- SPECULATION. A maximum of 10% of your portfolio should be allocated to what we call ‘educated speculation’ – yes this can mean cryto, NFTs, but also fine art, whiskey or watches.
- GAMBLIING. Should be for entertainment only, stick to your entertainment budget, think of these plays as ‘buying a ticket to ride’.
Happy reading, stay safe and don’t forget – We are Locals, Investing for Locals, and here to help.
If you have any questions or queries, contact Amicus today.
