Bubbles Past & Present - Daren Atkinson, CFA Vice President, Portfolio Manager Michael Job, CFA Vice President, Portfolio Manager October 3, 2018
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Bubbles Past & Present
Daren Atkinson, CFA
Vice President, Portfolio Manager
Michael Job, CFA
Vice President, Portfolio Manager
October 3, 2018
Agenda 1. Review different investment bubbles throughout history 2. Examine characteristics that each bubble had in common 3. Highlight potential areas of concern today 4. Explore tendencies that increase likelihood of buying into bubbles 5. Discuss strategies to help avoid falling into these traps Bubbles Past & Present – 2018 Page 2
“History may
not repeat
itself, but it
rhymes a lot”
Mark Twain
Bubbles Past & Present – 2018 Page 3
Bubbles Historical Examples Bubbles Past & Present – 2018 Page 4
Tulipmania
• The first great speculative episode known in
history occurred in Holland in the 1630’s
• Tulip bulbs first came to Western Europe in the
16th century, and over time, enormous prestige
was attached to them
• The bulbs became very sought after and by
1636 prices were soaring … a single bulb could
be traded for “a new carriage, two grey horses
and a complete harness”*
Source: A Short History of Financial Euphoria, John Kenneth Galbraith
• In 1637 everything came to an end with the
collapse of Tulip prices severely affecting Dutch
economic life in the years that followed
Bubbles Past & Present – 2018 Page 5
Great Depression
• No episode stands out quite like the
Great Depression in the vast history of stock
market corrections
• The euphoric atmosphere leading up to the
crash and presumed financial innovation of the
day remains unprecedented
• Prices on the New York stock exchange began
rising in 1924 and by 1929 were hitting
astronomical levels
• Leverage was widely available with investors
able to purchase stock on 10% margin &
closed-end investment trusts were the flavour
of the day
• It all came to an end on October 21, 1929…
Bubbles Past & Present – 2018 Page 6
Great Depression
The Dow Jones Industrial Average
400
350
300
250
-89%
200
150
100
50
0
Dec-1923 Dec-1924 Dec-1925 Dec-1926 Dec-1927 Dec-1928 Dec-1929 Dec-1930 Dec-1931
Bubbles Past & Present – 2018 Page 7
Dot-Com Bubble
• Another historic economic bubble which
occurred from roughly 1997 to 2001
• Rapid adoption of the internet meant many
investors where eager to participate
• In the process, they completely forgot about
valuations and were willing to pay any price for
technology companies
• At its peak Nortel Networks represented over
35% of the Canadian market!
• The Nasdaq peaked on March 10, 2000 then fell
78% over the following 30 months
Bubbles Past & Present – 2018 Page 8
Financial Crisis • The Financial Crisis of 2007-2008 resulted from many factors but was triggered in large part by the subprime mortgage market in the US • The ‘Subprime Bubble’ was fuelled by securitization – the process of bundling mortgages to form new financial instruments • These bundles were then sold off as low- risk securities to investors around the world • The idea being if you diversified enough you would diversify away risk Bubbles Past & Present – 2018 Page 9
Subprime Example
§ Loan amounts to $2 million § 15, 20, 30, or 40 year term
§ No income/No asset § Interest only payments,
verification programs amortized or low payment
options (deferred interest
§ Up to 90% LTV may result)
Bubbles Past & Present – 2018 Page 10Financial Crisis
“It is hard for us with,
and without being
flippant, to even see a
scenario within any
kind of realm of
reason that would see
us losing $1 in any of
those transactions”
Joseph Cassano, AIG Executive
Bubbles Past & Present – 2018 Page 11Short Memories
“…when the same or closely similar circumstances occur again,
sometimes in only a few years, they are hailed by a new, often youthful,
and always supremely self-confident generation as a brilliantly
innovative discovery in the financial and larger economic world. ”
Kenneth Galbraith, A Short History of Financial Euphoria
Bubbles Past & Present – 2018 Page 12Bubbles Common Characteristics ü A consistent theme is that there is something new in the world that will change the way we do things… It is different this time ü There is always a sense of pride amongst participants that they have discovered or understand this new opportunity and others do not ü In many cases new financial instruments are created and are hailed by the investment industry ü Leverage often plays a role in accentuating the problem Bubbles Past & Present – 2018 Page 13
Today’s Environment
There are now over 1,500 different cryptocurrencies in existence and climbing...
Bubbles Past & Present – 2018 Page 14Digital Currencies
Odd One Out
Option A: Option B: Option C:
X
Coin
KODAKCoin will allow GuinnessCoin was TrumpCoin is a digital currency
participating developed for beer that is based on Bitcoin. By
photographers to take drinkers who can amass supporting the TrumpCoin
part in a new economy one coin for every 12 pints digital currency movement you
for photography, receive they consume. Using are supporting the "Trump
payment for licensing Blockchain technology it Patriots". People who are
their work immediately does not matter where in determined and motivated to
upon sale, and sell their the world you have a expose corruption and evil,
work confidently on a Guinness, you will be uncover truths and lies and
secure blockchain working towards your allow all people a chance to live
platform. next coin. in a free, peaceful and
prosperous world.
Bubbles Past & Present – 2018 Page 15Bitcoin Historical Comparison Source: Bloomberg, International Center for Finance at Yale School of Management, Peter Garber Bubbles Past & Present – 2018 Page 16
Cannabis Bubbles Past & Present – 2018 Page 17
4
8
12
16
20
24
28
32
36
40
44
48
52
56
60
64
68
Dec-2016
Jan-2017
Mar-2017
Mar-2017
Cannabis
Apr-2017
Bubbles Past & Present – 2018
May-2017
Jun-2017
Company Example
Jul-2017
Aug-2017
Sep-2017
Oct-2017
Nov-2017
Dec-2017
Jan-2018
Feb-2018
Mar-2018
Apr-2018
May-2018
Jun-2018
Jul-2018
Aug-2018
Page 18
Sep-2018Cannabis vs. Agriculture
Company Comparison
• Canopy is a world leading diversified • Formed from the merger of Agrium &
Cannabis company with over half a Potash
million square feet of production • The worlds largest fertilizer company
capacity with a leading retail distribution
• International growth opportunities exist, network in North America
and they have a head start on global • We expect the two companies to realize
competitors US $500 Million in synergies over the
• Canopy had negative earnings last year next 2 years
and is currently trading at 286 times next • Nutrien is trading at 17 times next years
years expected earnings expected earnings
Bubbles Past & Present – 2018 Page 19Behavior Biases
• When it comes to money and investing, humans
are not always as rational as we think
• Behavioral tendencies contribute to
investment bubbles:
• Confirmation Bias – collecting information that
supports the current belief and avoiding
information that does not
• Hindsight Bias – overestimating our ability to
predict the future based on the recent past
• Anchoring Bias – relying too heavily on one trait
or piece of information
• Herd Behaviour – comfort in following the group
(i.e. fear of missing out)
Bubbles Past & Present – 2018 Page 20Confirmation Bias
Confirmation Bias
Seeking information that supports existing beliefs
Bubbles Past & Present – 2018 Page 21Hindsight Bias
Hindsight Bias
Projecting current knowledge into the future
Bubbles Past & Present – 2018 Page 22Anchoring Bias
Anchoring Bias
Allowing initial or irrelevant information to steer decisions
Bubbles Past & Present – 2018 Page 23Anchoring Bias
Anchoring Bias
What are the last 4 digits of your telephone number?
1. Is the number of Doctors in London
higher or lower than this number?
2. What is your best guess at the
total number of Doctors in London?
Source: Dresdner Kleinwort Waserstein Research – Behaving Badly, 2006
Bubbles Past & Present – 2018 Page 24Anchoring Bias
Anchoring Bias
>7,000Herd Behavior
“Be fearful when others are greedy and greedy only when others are fearful.”
Warren Buffett
Bubbles Past & Present – 2018 Page 26Valeant Pharmaceuticals $350 $300 $250 $200 $150 $100 $50 $0 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Bubbles Past & Present – 2018 Page 27
Focus on
Fundamentals
• How much income will the
investment generate?
• How predictable is this income
expected to be?
• What price am I willing to paying
for the income?
• Do I trust the people running
the business?
Bubbles Past & Present – 2018 Page 28Wallet Test
• When investing in a company,
you are essentially handing
them your wallet
• Should you trust them with it?
• How have they managed
investors’ money in the past?
• Have their decisions created
strong returns?
• Are they running the
business in a responsible
manner?
Bubbles Past & Present – 2018 Page 29Price Check
10 Year Returns Based on Starting Period
Price To Earnings Multiple
Price To Earnings Return Over the
Range Next 10 Years
25x - 50x 1.5%
16.6x - 25x 8.1%
12.5x – 16.6x 10.7%
10x – 12.5x 13.3%
8x -10x 14.8%
7x - 8x 16.5%
Bubbles Past & Present – 2018 Pg 30Key Takeaways
• Trying to predict the timing of the next bubble is a difficult exercise –
it always looks obvious in hindsight!
• The best way to avoid bubbles is to understand the characteristics
they all have in common
• You may miss a good opportunity every once in awhile but will also
avoid the painful blow-ups
• Being aware of behavioural biases will also go a long way
to improve decision making
• Try to ensure the investments you make are in solid businesses
that are sensibly priced and run by good people
Bubbles Past & Present – 2018 Page 31Questions? Bubbles Past & Present – 2018 Pg 32
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