This post was originally shared in my DT Email Newsletter here.
This radical growth stock was in big trouble.
During the bust of 1969, a little-known company was the poster child for what went wrong back then. The thing is, in four years after its founding, this company got listed in 1968 at just US$6 per share.
Over the next two years of “share swaps” and cash deals, the company bought 27 companies, with revenues hitting US$68 million.
Share swaps means a company creates new shares and uses them to buy up other businesses.
This way, the company doesn’t need to raise cash. And the more valuable the shares, the more businesses it can buy. The stock went ballistic.
At one point, it hit US$52 per share and then peaked at US$140 million. It was a classic case of fundamentals don’t matter.
Gerald Tsai’s Manhattan “glamour stocks” Fund bought 122,000 shares at an average US$41. Even endowments of Harvard and Cornell Universities were in it.
What’s this company called? National Student Marketing.
It was founded in 1964. Within four years, this marketing business got listed. Back then, investors were hungry for growth stocks. And National Student Marketing provided it.
I want to make this critical point: National Student Marketing was far from making a profit. At the time when Time Magazine published this article, the company lost close to US$860,000 in one quarter.
This was in the 1960s.
In April 1970, the National Student Marketing stock sank all the way to US$3, from a high of US$72. This radical growth stock was in trouble. And it collapsed shortly after.
Its CEO, Cortes Wendes Randall was jailed 18 months in prison for fraud.
National Student Marketing was not even making money. But it was good at captivating the stock market.
People think such gains were possible in that kind of “bullish” environment. That it has become “normal” for stocks to grow more than 1,000% in a year.
The stock market rally came with a dark side. And National Student Marketing was a prime example.
History doesn’t repeat, but it sure rhymes
You see, during the go-go years of 1969, people were jumping on crazy ideas without any real substance. Shares of big names like Xerox and Kodak collapsed.
Now, there was nothing wrong with many of these stocks. They were simply overpriced.
Right now, the stock market is trading at all time highs. According to Warren Buffett, the stock market is overvalued.
This valuation measure, which was made popular by Buffett over the past 20 years measures the total value of stocks relative to nominal GDP.
It’s at a record 3.5x today.
Here’s the thing, Buffett has warned before anything above 2.0 suggests Mr. Market is overvalued. This is also why he has been holding hundreds of billion dollar cash in Treasuries doing nothing.
While it may not be the hyped up growth stocks, but a basket of “rich in valuation” blue-chips you see today are exactly a mirror image of the 1960s go-go market mania.
Today, some of the biggest tech companies are spending heavily on infrastructure: data centres, chips, and also the talent. The scale is enormous.
But here’s the key point: the cash is going out today, while the full cost doesn’t show up in earnings yet.
Even OpenAI is loss making…
Hyperscalers like Microsoft, Amazon, Alphabet are spending more and more of their capex, resulting in free cash flow to drop.
The once asset-light tech businesses are becoming more capital intensive – and the stock market doesn’t seem to care.
These companies are great businesses. I just question the price. They call it: “irrational exuberance”.
We’re in an AI boom – whether we’re at the peak of the bubble I don’t know. What I do know is when the market is euphoric, it’s not always that simple to spot danger. That’s what worries me.
There’s one big similarity between today and the late 1960s. And that’s the whole concept of “buying high quality businesses at fair prices” is getting thrown out of the window.
But as long as we take a step back, listen to our common sense, we will do well.
Believe me: Stick to the fundamentals. Look for high-quality businesses that make economic sense. And never, ever overpay for a stock, no matter how attractive it looks.
This is how I invest my mom’s money, my family and friend’s money – protecting and accumulating wealth is more important than putting money at risk.
What do you think?
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
