It may not be the most popular opinion among everyone reading this column, but I love stock market crashes.
For two reasons. Listen to me.
Reason 1: Bubbles Make Stupid People Look Smart
An asset bubble inherently requires the price of an asset or asset class to deviate from its intrinsic value. The inherent value of an asset is based on the (time-adjusted) value of the cash flows that the asset is able to return to its owners.
In an asset bubble – like the “everything” bubble we’ve known for the past few years – speculators and gamblers (or just outright scammers) come up with new ways to convince speculators that they shouldn’t value a asset based on future net cash flows, but rather provide other “smarter” ways to value the asset. A common method (which was also popular in the dotcom bubble of the 1990s) is to ignore net cash flow and simply use a multiple of sales or revenue to value an asset.
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The beauty of using a price-to-sales multiple for someone selling an asset is that the profit or input costs can be ignored entirely. Instead, the person buying the asset is instructed to watch how quickly sales are increasing and place a multiple on what is in many cases a misleading data point.
Of course, sales aren’t entirely irrelevant – in determining a company’s cash flow, sales are the first thing you need to look at. However, this is not the only thing. There are also the lesser things – i.e. the costs incurred by a business to generate those sales – that are equally important.
When you focus solely on sales, the person managing the asset has a strong incentive to spend a lot of money on things like marketing and staff to generate more revenue. This creates an almighty agency cost – managers and founders run a huge loss company using investors’ money, increase revenue, sell shares to new investors who get bamboozled by rising stock prices of action. The founder then becomes rich, buys a Ferrari and a vacation home and spends a few years giving TED talks. (A few years later, the company will likely go bankrupt, but by then the founder and executives have quietly moved on to running their family office.)
Just look at the growing list of publicly traded stocks that have been decimated, many of which are in danger of ending up at zero.
The buy now, pay later sector, which is collectively worth less than nothing, led the charge: Zip is down 90%, Openpay is down 82%, Sezzle is down an even more impressive 93%.
Afterpay (remember them), now hidden as part of Jack Dorsey’s Block, is effectively down about 75%.
Unlike most founders who got too easily caught up in the hype, Afterpay’s Nick Molnar and Anthony Eisen are far too smart, selling the largely worthless Afterpay business just below its peak and they probably would have offloaded by now. most of their block holdings.
Had they not been sold, Molnar and Eisen’s stake would have fallen from $2.7 billion to around $750 million.
And there is even more good news. Remember Beforepay, a favorite of this columnist? The rapacious payday lender that posed as buy-it-now, pay-later while furiously burning capital like a wildfire out of control? Its stock price is down 84% and worth only a fraction of the capital that incompetent speculators gave it.
And don’t forget Robinhood, the Silicon Valley-created beast that, backed by the biggest names in greedy venture capital, refused to employ customer service operators, literally killing its young customers. Well, Robinhood shares are down 88%. Good riddance.
And let’s not forget the biggest downside of all: crypto. Led by Bitcoin, the crypto was meant to be a store of value (it’s not), then pretended to be a hedge against market risk (it’s the opposite). BTC, the best of a very bad bunch, is now down nearly 60% from its peak. (Many people who used leverage to buy BTC, a key feature of crypto fraud, would be broke, hence the very quick unwind).
Many other cryptos are completely worthless. NFTs, that totally bizarre concept that at one point saw a JPG sold for US$60 million ($87 million) also cratered, highlighted by the moron who paid $2.9 million ($4.22 million) for an NFT of Jack Dorsey’s first tweet last year, and this year couldn’t sell it for US$7,000 ($10,000) – a practical tax loss of 99.77 %.
Second reason: crashes help the poorest people, bubbles help the old and wealthy
When an asset price increases sharply in value during a bubble, the beneficiaries of this gain in value are those who already own that asset – in the case of real estate and businesses, it is almost always the elderly. rich. When the price of residential real estate increases, it becomes increasingly difficult for young people to buy a house (and if they do, they face decades of high debt).
This is great for seniors who own multiple properties and benefit at the expense of those who don’t yet own the asset.
The same is true for businesses. I love Netflix, Google, Airbnb, Amazon, and Apple (and even Peloton) as companies, but at the end of last year they were outrageously expensive (in Peloton’s case, it’s comical).
A stock market crash that drops their stock price by up to 90% suddenly makes a company like Netflix or Peloton almost fair priced. Even with Airbnb reporting record EBITDA and revenue down about 50%, it gives younger investors the opportunity to buy at a semi-decent price.
This is the simple reason why politicians, who work for baby boomers, create a series of policies that try to prevent markets from adjusting properly. From the US government’s 2008 TARP program to JobKeeper (a gift from future taxpayers to the wealthy), to virtually every property tax incentive like negative gearing or the principal residence tax exemption. Or completely dumb central banks (and our RBA is probably the dumbest of them all) keeping interest rates at the lowest in a millennium while inflation was clearly skyrocketing to 40-year highs, all to protect over-indebted property owners.
Eventually, even the least-meaning policymakers run into a market adjustment that their mess and theft cannot prevent, giving young people a chance to buy assets at fair prices.
I love crashes. You should too.