May 4, 2021 6 min read
This story originally appeared on StockNews
Warren Buffett has done a great job in the past highlighting the risks of investing in foamy sectors. The lessons apply to investors in stocks like Tesla (TSLA), NIO (NIO), Fisker (FSR), and Xpeng (XPEV).
Each bull market has different themes in terms of technology, demographics, geopolitical considerations, and government policy. However, they tend to follow the same emotional path – from fear to greed. In some ways it is similar to the way each hit is unique, but follows the same general structure in terms of its progressions, chorus, and themes.
The bull markets also tend to focus on specific industries made up of stocks with high valuations based on projections of future performance and market size. Currently, electric vehicles are one such example. Despite the KraneShares ETF for electric vehicles and mobility (KARS) has declined 20% in the past two and a half months, down 150% since the lows in March 2020.
Given the industry’s high valuations, it’s no surprise that value investors like Warren Buffett aren’t interested in investing in EV stocks right now. While Buffett hasn’t made too many comments on electric vehicles, he has the massive risks of the dot-com bubble in Berkshire Hathaways (BRK.B) Annual general meeting last weekend. And there are many similarities between the late 1990s and today. So I believe that investors in stocks like Tesla (TSLA), NOK (NOK), Fisker (FSR) and Xpeng (XPEV) should take into account Buffett’s earlier insight on the matter.
Bezos and Buffett
During the 1999 Sun Valley conference, Buffett called the bull market in technology stocks a bubble, comparing it to other bubbles that had previously burst, such as airlines and auto stocks.
“Well, I thought it would be instructive to go back and look at a couple of industries that changed this country much earlier in this century: automobiles and aerospace. Let’s take the car first: … Overall, in an industry that has had an incredible impact on people’s lives, there seem to have been at least 2,000 makes of cars. If you had foreseen how this industry would develop in the early days of automobiles, you would have said, “This is the path to riches.” What did we achieve in the nineties? … we came across three US car companies – no lollapaloozas for investors themselves.
The other really transformative business invention of the first quarter of the century besides the automobile was the airplane … So I went back to examine the airplane manufacturers and found that in the period from 1919 to 1939 there were about 300 companies, only a handful of them breathe even today.
Proceed with airline failures. Here is a list of 129 airlines that have filed for bankruptcy over the past 20 years. The key to investing is not in assessing how much an industry will affect society or how much it will grow, but in determining a company’s competitive advantage and, most importantly, the longevity of that advantage. The products or services that are surrounded by wide, sustainable trenches are the ones that offer rewards to investors. “
Of course, that quote was with many technology leaders in attendance while Buffett was viewed as someone who “didn’t get” the internet. Attendees included Jeff Bezos, the founder and CEO of Amazon (AMZN), who saw it as a warning sign that the success of his company was by no means guaranteed.
It’s probably no coincidence that Amazon managed to survive the dotcom crash and then thrive while many dotcom stocks didn’t survive.
In one (n items via Amazon a few months later in Fortune Magazine:
Bezos said of the speech: “When new industries become phenomena, many investors are betting on the wrong companies.” [Referring to Buffett’s 70-page catalog of mostly dead car, airplane, airline and truck makes] “It struck me that decades ago it was imperative to use ‘Motors’ in the name, like everyone uses’ dot-com’ today. I thought, ‘Wow, the parallel is interesting.”
Says Bezos, “Buffett’s analogies about bankrupt companies resonate deeply.” Now, according to Buffett, Bezos is spreading the gospel and urging Amazon employees to be afraid every day. “We still have the opportunity to be a footnote in the e-commerce industry,” he says.
What EV investors should be aware of
The bubble that exists in the EV industry is likely to play out similarly to previous industry bubbles. The entire EV market will grow, but likely only a handful of companies will emerge as winners.
Click here to read our electric vehicle industry report for 2021
There are a lot of similarities to the previous bubbles as there is so much new supply that gets absorbed at high ratings. Many of the companies have no significant production or are still in product development mode. These types of companies can typically only go public in foamy markets.
It is also likely that most will fail due to the difficulty of scaling production, increasing sales and profitability. All of these are difficult tasks that companies routinely fail at, even with billions in the bank and decades of experience.
EV investors are taking note of this important lesson from the Omaha Oracle. While the EV industry is sure to continue to see impressive growth, many of the sky-high valued EV companies today are unlikely to exist within a decade.
Discover today’s best growth stocks
This article was written by Jaimini Desai, Chief Growth Strategist at StockNews.com. Jaimini was voted into the hottest trends in investing:
- Electric vehicles
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TSLA shares. Since the beginning of the year, TSLA is down -4.54%, while the benchmark index S&P 500 is up 11.53% over the same period.
About the author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. Its aim is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist at StockNews.com and the editor of the POWR Growth newsletter. Find out more about Jaimini’s background, as well as links to his latest articles.
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