Tuesday, March 09, 2021

Fake risk, fake growth stocks, and misallocation of capital

Bitcoin is the world's largest bubble, its total value is just over $1 trillion now. It's not a conventional stock although it is right to consider it a stock of a worthless company. Tesla was the other big bubble and almost reached the capitalization of $0.9 trillion. These are no longer negligible amounts of money – note that one trillion is about 1% of the global GDP per year. But these two are still just two tips of a more complex iceberg.

I've discussed one way to generalize these bubbles, the Gamestop and meme stock mania. We may look at all the stocks whose price is insanely inflated by totally dumb sheep, mostly retarded children, who have learned to read and who are using bizarre servers such as Reddit.com as sources of "orders what they will immediately do with the money but without any questions".

Gamestop, the most notorious meme stock, has reached some $400 before it returned at least to $40. However a new wave of insanity has brought the stock to the current price above $190 again. This kind of insanity won't evaporate before a sufficient number of these braindead sheep suffer or e.g. starve to death. But we live in a hyper-PC world where their extremely well-deserved misery is discouraged by the system which means that this kind of behavior is really encouraged. So this idiotic behavior will probably be a part of the world for a long time and although I am often an optimist, I expect this pathology to keep on growing.



Another way to generalize the insanity is to look at the publicly traded ETF funds which hype worthless stocks in this way. Cathie Wood's ARK Innovation ETF (and a few more similar funds) seems to be the most notorious example. As far as I know, this lady is financially illiterate and completely lacks any common sense. I wouldn't allow her to become a manager of my toilet paper but a whole network of idiots has turned her into a guru of a sort. And it has consequences.



So the ARK Innovation ETF fund accumulates stocks in some 35-55 "disruptive" companies. In practice, they are companies generating no profit whose P/E is at least 400 if they accidentally produce a profit, by some engineered tricks or subsidies or successful betting etc. The current composition of the fund starts with

* 10% Tesla Inc (electric cars)
* 6.2% Square Inc (mobile payment tools)
* 5.9% Roku Inc (some media players)
* 5.6% Teladoc Health (videocalls with doctors who tell you to eat vitamin)

Other, similar companies, represent 3% of the fund or less. You may write the name of a company, add the word "ticker", and make a Google search. You will see that all of them have experienced a bubble-like behavior but none of them is really capable of producing real profits. Because of the huge growth of such Tesla-like companies' stock prices, the ARK Innovation ETF fund reported some 35% annual yields for several years – although it dropped from $157 to $117 in recent three weeks. It could be the beginning of the bursting of the bubbles... or not.

Do the fund's 35% returns prove that she understands something about the financial markets? I don't think so. She doesn't have any miraculous ability to pick the future disruptors – it is probably more or less impossible and in these ordinary affairs, the big winners owe a big fraction of their success to good luck. But what is actually happening is that some stocks that are already overvalued by a factor of 10 are hyped by this lady and they become overvalued by a factor of 100 or 1,000 because other "investors" are blindly following her orders. Because she makes the "investment" decisions before others, her fund earns more money than others. What she is doing is the classic pump and dump fraud and we may see that the U.S. court system is in a very bad shape because she's not (and her fake "media" collaborators are not) sitting in the jail yet.

Most of the brainwashed sheep say "these are growth stocks" whose amazing valuations are justified by the equally amazing future of these companies. But these are self-evident falsehoods. In particular, Tesla (which lost 37% since a peak a month ago but is still overvalued by a factor of more than 100) is no longer competitive because every carmaker can make similar cars and most of them are already better and cheaper than Tesla models. On top of that, the electric cars aren't really an important or profitable class of products, anyway. And Tesla isn't even making cars most of the time because of the shortage of chips.

A simple question: Is Tesla a growth stock? The first sentence defining a growth stock says:
In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.
Oops, so the growth stock should have a substantial and sustainable positive cash flow. Let's look at the graph of the Tesla cash flows:



The absolute value is comparable to $1 billion per quarter – about 0.1% of the capitalization of the company – and the sign seems almost completely random. So the cash flow is neither substantial, nor reliably positive. Its being positive isn't sustainable, either. So the statement that Tesla is a "growth stock" is simply a lie. The rational expectation for this company and for others in the list is a negative growth. There is surely no good reason to think that these companies "should" grow (much) more than other publicly traded companies. What the scammers like Ms Wood actually mean is that it is a stock for which the sheep should abandon all the common sense and pay 100 or 1,000 times greater amounts of money for such a stock than what could be justified by the fundamentals. "Growth stock" is used as "stop even the last traces of your brain activity".

The term "growth stock" has an actual, legitimate, useful meaning in the world of finance but it has been utterly bastardized. Most people who use the term "growth stock" in 2021 mean "a false but universal justification for scammers and their pet imbeciles to grow shockingly obvious, insane bubbles and to be deaf to any rational arguments".

Is that useful when companies like that become this overpriced? Not really, it is very harmful because they are sucking and wasting capital – which aren't just some abstract numbers. To waste capital means to waste resources (and to cut forests around Berlin and elsewhere), to waste human work, and human lives (I mean the time of their life that the people need to waste). Equally importantly, it means to rob the actual good opportunities of their ability to collect the required cash, resources, and human capital (and it robs forest animals of their habitats, too).

Shouldn't such bubbles quickly burst if they don't work? No. The reason is that it is really straightforward to make products and services in such a way that the profit margin is approximately zero. It is enough to roughly copy the industrial activities done by others and you will end up doing services or making products at a nearly zero profit margin, sometimes positive, sometimes negative, and that is what all these worthless companies are basically doing. But there is no added value and it is added value that should determine the stock price but it doesn't. "Tesla" is this hyped because of the things in which it allegedly differs from others – but it is exactly the part that has no value (or has a negative value).

In effect, the growth of similar insane bubbles – on companies without any added value – has the effect of extensively increasing the volume of some activities (the "big picture" organization and marketing of the activities that are "microscopically" the same what everyone else is doing) that are really worthless. Tesla is still the canonical example. In healthy conditions, it just couldn't get the capital to build the new "Gigafactories" because it produces no reliable enough profit. Banks just wouldn't lend billions to a carmaker that hasn't produced a real billion in profits in 18 years. But because of the bubble mania (which hugely overlaps with the cult of personality of the boss in this case but that is not really the case of the other ARK companies), the company has repeatedly collected new cash by selling bonds or issuing new stocks whose price vastly exceeds any real or reasonably expected cash flow. Tesla hasn't produced any "unquestionable profit" once since in birth in 2003.

But Tesla is a "growth stock" in the sense that a whole army of scammers and their braindead sheep are actively and artificially "growing it" – regardless of the absence of any real success – by pumping new and new billions into something that self-evidently doesn't have any added value. Sometimes it's their money, more often it's money taken from the parents who actually had to work hard – or do something that did have a genuine added value. The work by these parents is being retroactively turned into a wasted time. The whole society and the whole economy suffers as a result. The other companies in the world are still capable of doing something useful and they guarantee a positive growth rate (of the world GDP, for example). But the growth rate would be vastly higher if people were sensible and weren't pumping billions (and now trillions) into black holes.

Finally, I must mention a frequent meme by the defenders of these manias: It is great to encourage risk taking. Well, yes and no. And in similar circumstances, the words "encouraging risk" become self-contradictory. What do I mean?

You know, "risk" means that one has a significant probability of being rewarded (perhaps rewarded a big time) for some success; but there is also some probability that things go wrong and the person or company suffers or dies. If the latter possibility is non-existent, so is the risk! The word "risk" means that things can go wrong. If they can't go wrong, there is no risk. If you're insured, you are no longer exposed to risk. ;-)

So some people think it's ethically great to support the likes of Tesla because they are taking a risk. We actually know almost identical talking points by some far left anti-physics crackpots who also wanted themselves and their pet fellow crackpots to be generously supported by the system – for being self-described as the people who take a risk.

Sorry, it just cannot work like that. If you arrange some reliable influx of cash for XY so that XY can do whatever he or she or it or they want, without worrying about the consequences of the "risky" behavior, then XY doesn't run any risk at all, can't be legitimately rewarded for that non-existent risk, and the whole scheme is an oxymoron. At least for 18 years, Tesla Inc was shielded from the usual risks of the financial markets and it didn't need to produce any real profits etc. because it could have relied on a whole army of brainwashed and braindead sheep with cash that would be pumped into Tesla Inc no matter what. Numerous physics crackpots have been capable of getting into the same comfortable situation.

But you should read the biographies of many of the great men and several women of the past – including great scientists and pioneers of technology – who actually underwent genuine risk and who often paid dearly, ended in poverty, and so on. Their courage was often extremely useful, it is important for a fraction of the people to take a risk but it must be a real risk, not fake risk or "risk in the name only". Paying someone generous welfare to "run a risk" is completely fake – and it is counterproductive for the whole, too. It is another typical post-modern socialist theater farce in which the person called "courageous" is not courageous at all. In reality, both in the corporate and scientific context, such a person ends up being a spineless entity with zero courage, a freeloader fed for claiming to be something that he or she is obviously not.

Finally, an important point is that while this useless person, useless pseudoscientist (like all those crackpots who claim to revolutionize foundations of quantum gravity but they haven't learned even basics of string theory which is the most elementary pre-requisite), or a worthless company on generous welfare has been liberated from real risk, the payer hasn't. The payer – and sometimes it's a private sponsor, sometimes it's a government, sometimes it's a whole nation or mankind – just runs genuine risk by paying for the people and companies that just pretend to be courageous. When the total volume of similar commitments is too high, too much blood is sucked from those who actually support the system and the whole system may collapse – analogously to the collapse of the Soviet Union and that is a less dramatic example.

So please, when someone abuses the term "growth stock", scream at her or him. When someone claims that courage and risk exists at places where the people are more shielded and financially secured than almost everyone else, scream at them. These are parasites and they are working to bring misery to the whole nation or mankind.

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