I’ve always been fascinated by crowds and how their energy can sometimes spontaneously erupt. A personal all-time favourite crowd watching moment was the 1985 Live Aid concert, Freddie Mercury conducting the Wembley crowd and the “Ay-Oh” chant described as “the note heard around the world”. He nailed it. And, he’s doing it again. The contents of Freddie’s Garden Lodge home are on exhibit in the Sotheby’s auction rooms of New Bond Street for all of August and well over 100,000 people have queued for hours to take a peek. Of the thousands of lots on show, from the Yamaha piano, to the original Bohemian Rhapsody lyric sheet, to his art collection there is one item which has caught my eye in recent press coverage. A silver Tiffany moustache comb, estimated to be worth £400-£600, is currently expected to fetch over £24,000 and that should not really surprise. In fact, those that believe this emotional “premium” only applies to collectibles and celebrity memorabilia would be very wrong. You see, there are lots of crowds out there and it doesn’t always make sense. Here are a few current favourites of mine…
Banking: A short five months ago, the Swiss banking authorities had to plead with UBS to ‘rescue’ the collapsing Credit Suisse(CS) banking group. In the end, UBS paid $3.4 billion to acquire the entire assets of CS. Fast forward to this week and UBS have posted a Q2 quarterly profit of $29 billion! This is the largest quarterly profit in banking history but the vast majority of the Q2 profit was an accounting treatment of ‘negative goodwill’ acquired with CS. In main street speak UBS is booking the gap between the $3.4 billion acquisition price and the ‘value’ of the assets on the CS balance sheet. Sadly, for CS, at the time of takeover there was a total lack of confidence in those assets(loans, property, IT, investments etc) and there was a “crowd” of buyers which amounted to precisely one.
Automobiles: The internal combustion engine (ICE) has been around, mostly unchanged, for more than a century. But, there’s a new electric (EV) guy on the block, with Tesla being the trillion dollar poster child of the EV revolution. The crowd who cheerlead this revolution are very excited but there is another large crowd of investors who wonder about the competition from the traditional players like BMW, Toyota, GM and Ford. To illustrate this crowd push-pull, check out the recent IPO of the third most valuable car manufacturer in the world which you’ve never heard of, VinFast. This Vietnamese EV manufacturer is yet to make profits but at one point of trading post-IPO in New York the company was worth more than Ford, BMW and GM combined. A $170 billion climb in value to almost $200 bilion in just 4 trading days was followed by a $130 billion collapse in value over the next 4 days. That’s how two big crowds sometimes work.
Restaurants: Subway, once the largest franchise on the planet, has sold its 37,000 restaurants to private equity player, Roark Capital, for just under $10 billion. Now, consider McDonalds with a very similar market footprint of 36,000 restaurants. It’s a bigger hit with the fast food crowd, doing nearly 50% better annual revenues of $23 billion(vs $16 billion). However, here’s the real crowd kicker – McDonalds is valued at more than $200 billion or 20x Subway. If you look more closely, you’ll see McDonalds is not just a food business, but a brilliant property business. However, some property crowds can be fickle…
Offices: At its peak, serviced office player, WeWork, was valued at $47 billion. Its 2019 IPO was originally pulled but eventually listed in 2021 with a $9 billion market cap. Today, not so much. A 99.9% collapse in the share price and its fantasy balance sheet leaves WeWork on the cusp of liquidation. The days of founder Adam Neumann’s private waterfall, 3 storey water slides and $1.7 billion severance “parachute” are now but a distant, albeit soggy, memory.
Insurance: Like banking, a purchase, when the crowd is tiny and all are fearful, can be very lucrative. Check out recent news closer to home that Axa has purchased Laya Healthcare(formerly known as Quinn Insurance) for €650 million. As recently as 2015, AIG bought this book of business for just €80 million. It was a small buying crowd back then…
Artificial Intelligence(AI): The research analysts thought Nvidia was a bit giddy rich in valuation when its share price surged 80% in the first weeks of this year’s ChatGPT excitement. Then in May, Nvidia told the analysts everybody’s forecasts needed to be revised UPWARDS by 50%. It turns out Nvidia’s semiconductor chips are critical to AI processing power so the stock before its results last week was sitting on a $1 trillion valuation or almost 40x its revenues(not profits!!) – and you thought 10x for SaaS was exuberant? And, guess what? Yep, Nvidia’s results last week showed revenues for the last quarter still beating the upwardly revised estimates of Wall Street’s finest minds by another $2 billion…
The above illustrations are not exactly Malkiel’s “Random Walk Down Wall Street”. However, Malkiel’s 50- year old message is just as relevant today; asset prices are random and unpredictable. Crowds play a big part in unpredictability and can make it difficult for investors to spot emotional ‘fear’ or emotional “exuberance” in a valuation. But….. there is a way for an investor to play to bigger and more varied crowds.
We have written many times about the value of a portfolio approach to investing. Trying to time, or spot, opportunity on an ad hoc basis is fraught with challenges. The superior investor knows that regularly adding to a portfolio keeps them in the market at all times irrespective of “the crowd”. As a stark illustration, the entire excess returns of the S&P 500 in its almost 100 years of existence(1926) were delivered by just 4% of stocks in the database(Source: Bessembinder, Arizona State University 2017). That might rock you, but you don’t need to comb through all the research; Buffett and Lynch have said it for decades. The best investment strategies represent a portfolio of crowds.
