Picking Winners in a Mania
It is always difficult to know whether you are in the beginning, middle or the end of a mania. What is knowable is if a company is profitable and if that company has a dominant market position. Whilst the profits and market position of a more stable company and industry may change over time, they are generally far more predicable than picking winners in a mania.
In the early 1900’s, there were hundreds of car companies. Only a few survived.
Cars changed the world, yet investing in the car industry has been disastrous.
Investing in things that will change the world is often far more difficult than most comprehend.
Today, there are countless EV car companies starting up. Many are in China. Knowing which ones will survive, let alone win the race is almost impossible.
It is often far better to buy stable companies.
There are only a few alcohol, paint and lift companies in the world. They are stable, profitable, predictable and boring. Sadly, many of the boring companies are expensive and are being priced more like bonds.
Is it better to pay 35 times earnings for a boring company that is not growing much, or is it better to pay 100 times earnings for a fast-growing company, which may or may not be a winner in its field? The former is possibly the least worst option.
There are some exceptions to the rule when investing in things that will change the world. Some of the Software as a Service (SAAS) companies are building network effects that are insurmountable. They have a huge platform for growth and the more they grow, the stronger they become due to having more data. The margin expansion that is still yet to come is considerable. The problem at the moment is many have years of growth already priced in. The eventual growth slowdown may lead to many years of lacklustre stock performance. When is unknowable.