Why 2021 seems like 2000 for stock markets – Times of India

Every reasonable investor must have, at least once in a lifetime, their own ‘Lucky Fool Moment’. Mine came in February 2000. Having luckily invested a small amount of money, in a handful of tech stocks, in 1998-1999, I sat one afternoon in early 2000 and shook my head in disbelief. Myportfolio of largely junk tech stocks (tech, back then, was defined as any company having a website) was up around 20 times in two years, making me a stupidly rich mid-30s guy, blessed with no special skill except having been in the right trade. Thankfully, I suffer from an inferiority complex about my investing skills, and my portfolio said to me: “You are nothing but a lucky fool”. I took my money off the table, paid my taxes, and went off on a holiday to Spain. Things were pathologically ugly when I returned after a month.
2021 has seemed eerily similar to 2000. There have been millions of ‘lucky people’ on the planet in the last couple of years. The pandemic rid millions of jobs. The stock market gave those millions the keys to the kingdom, by giving them full-time investing/trading jobs. We have reached 2022, in one piece, but with a planet full of highly confident 25-35-yearolds. Is this going to end well?
What most people forget or don’t understand about markets is that outcomes in markets are simply a range of probabilities. At any given point in time, you can have a range of probabilities supporting any thesis – bullish or bearish.
The probabilities that confront us right now, on a global equities basis, are largely in the amber zone. There could well be a sliver of green, may be a 10-20% chance that markets remain extremely buoyant in 2022 as well.
Analysis of a nearly 100-year period shows that the probability of markets delivering substantial positive returns, for a 4th consecutive year, are next to zero. Global markets have delivered excellent returns in 2019, 2020, and 2021. Statistically, we are set up for a down year in global markets. Or at least, a flattish year. That’s what long-term probabilities tell us. It pays to keep an eye on the clustering of probabilities.
What can cause a market downturn? Well, all the classical signs are in front of us.
Take the bubble in startups. A company doing grocery delivery in 8 minutes gets a valuation of $600 million, in weeks. Now, for the life of me, I don’t understand who would want groceries delivered in 8 minutes. And I can’t understand, beyond this, why any business case can be made for a company that does 8-minute delivery.
A fintech (I suspect it’s the old NBFC + an app + two guys from IIT) approached me recently for funding. The ask? A $3-million raise at a $20-million valuation. Revenues just under $150,000. And the founders showed data that companies with even lower revenues were getting valued even more.
The IPO market is another red flag. Retail is rushing in, buying stuff at 50x revenues (PE multiples are so 1998). I do believe there is an 80% chance most ‘new age’ companies will be reverse compounders. This is a term I coined in the 2000 tech bust, meaning stocks that compound 50%. On the way down, that is. That said, there’s already a deep, savage bear market on, globally, in new age companies. Here’s a small list: Peloton, Roku, Fiverr, Jumia, DocuSign, Mercado Libre, Wayfair, Snap, Zalando, Sea, Delivery Hero, Hello Fresh and Doordash. Thank God, Indian TV channels don’t show all this PG-rated stuff.
When the rate cycle turns, as it has, for now, stocks with no valuation support, get their legs cut from beneath them.
Lastly: Every micro-cap is either an EV play or has ‘carbon credits’. If something has both, you get a billion-dollar market cap in 6 months. Even a jewellery company has an EV play now. If all this isn’t plain nuts, then I am too old for this game. Even though I am playing this same game happily but slyly, hoping that I am a ‘lucky fool’ again, 20 years on.
The author is co-founder of First Global