Just because it’s plausible, doesn’t mean it’s right

Investing manias didn’t stop with tulips, or the South Sea Bubble — or the dotcom era and subsequent dubious investment themes.

Daffodils in the grass

Image source: Getty Images

Back in the 1960s and 1970s, the ‘Nifty Fifty’ were 50 large American companies whose shares were regarded as solid, dependable, low-risk growth stocks, with stable earnings.
 
Companies such as Coca-Cola, General Electric, Procter & Gamble, and Johnson & Johnson, in other words: the bedrock of the American economy.

The proposition for investors was simple. These were companies that were built to last, were well positioned for growth, and were well managed — so buy a broad cross-section of the Nifty Fifty, hold for the long term, and forget about fancy stock picking.
 
It worked great — right up until it didn’t. First, some of the Nifty Fifty weren’t in fact so nifty, after all. Eastman-Kodak, Polaroid, Xerox, Gillette: need I say more? Plus, valuations became stratospheric, over time. By the early 1970s, valuations — price-to-earnings ratios — were around 70.
 
Eventually, a few years into the Seventies, it all came crashing to earth. As, doubtless, so might today’s wildly hyped ‘FAANG’ mania, with FAANG standing for Facebook, Apple, Amazon, Netflix, and Google (now Alphabet).

History repeats itself

The trouble is, such episodes are far from isolated examples — and indeed, stretch right back to the South Sea Bubble of the early 1700s, and the Tulip Mania of 80 years earlier.
 
The dotcom mania, for instance. In the mid-1990s, any stock that could spin a half-decent e-commerce tale — and many that, frankly, couldn’t — got swept up in the same rabid enthusiasm, seeing sky-high valuations and a mass suspension of investor disbelief.
 
You didn’t need profits, or even sales revenues, investors were told. You needed ‘eyeballs’. Or was it ‘clicks’? I forget.

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But eventually — in the closing hours of 1999, as it happens — reality rudely intruded.
 
One by one, the dotcom heroes crashed to earth. And even those that survived — such as Amazon — did so with massively lower valuations and share prices.

BRIC’d

These investing ‘themes’ — as they’re known — aren’t always just about companies, or industries.

Remember the BRICs? For a few years, anything to do with Brazil, Russia, India, or China could do no wrong.

But of the four, only China has really stood the test of time. And that is more as an economy, not so much as a source of reliable homes for your investment cash.

Russia, India, Brazil? One way or another, the shine has undeniably come off.

Sell! Sell! Oh no, buy!

Now let’s come closer to the present day. Last October, to be exact. And here’s a sorry tale not about misplaced claims for what investors should buy, but for what they should sell.

Anyone remember the COP26 climate change conference in Glasgow last October, attended by world leaders, and kicked-off by our very own Boris Johnson?
 
Countries signed up to ban future oil exploration, to call a halt to new oil fields, and phase out fossil fuels as quickly as possible. Analysts queued up to point out that the balance sheets of the world’s major oil giants had a fatal flaw: their gigantic oil fields were largely valueless. ‘Stranded assets’ was the term used: the oil was there, alright — but no one would want it.
 
Then Russia invaded Ukraine. Suddenly, those same world leaders — Boris Johnson among them — were touting ‘energy security’.
 
And equally suddenly, stock markets came to the realisation that those same unloved oil giants’ balance sheets were stuffed full of valuable ‘black gold’: oil reserves that were no longer stranded, but immensely valuable.
 
Their share prices soared commensurately. My holding in Shell, for instance, is up 49% since COP26. BlackRock Energy and Resources Trust, another holding, is up 44%.
 
Clearly, anyone who sold out of the oil majors in the wake of the COP26 hoopla will be feeling virtuous, but poorer.

Their hype; your risk

My message in all this? Avoid getting sucked in by grandiose — if persuasive — investing themes.

A dabble, yes. A modest investment, maybe.

But have an eye to the downside. Don’t bet the farm. Stay diversified, and don’t over-commit.

The narrative may be compelling, but that doesn’t mean that it is true — or inevitable.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Malcolm holds shares in Shell and BlackRock Energy and Resources Trust. The Motley Fool UK has recommended Amazon and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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