The Incorrigible Speculative Public and the Mechanics of Market Bubbles

Key Insight

The speculative public consistently demonstrates an incorrigible tendency to chase 'hot' issues, disregarding fundamental value in favor of perceived 'action' and trendy themes. AAA Enterprises, for example, capitalized on the 'magic word franchising' in 1969. Its stock was offered to the public at 13 dollars per share, quickly doubling to 28 dollars, giving the company an 84 million dollar valuation against a book value of 4.2 million dollars and maximum reported earnings of 690000 dollars, equating to 115 times current earnings. This occurred despite its founder selling 300000 shares for 3.6 million dollars personally, having a book value of only 180000 dollars.

The short-lived success of AAA Enterprises highlights market heedlessness: After nine months of modest earnings in 1969, the company lost 4.365 million dollars in the subsequent three months, consuming all capital raised and most prior earnings, leaving just 242000 dollars or 8 cents per share for shareholders who had paid 13 dollars. Despite imminent insolvency, the stock closed 1969 at 8.125 dollars bid, representing a 25 million dollar valuation, further demonstrating market irrationality. Modern examples confirm this pattern: Virgin Galactic, a space travel SPAC promoted by an influencer, saw its shares triple to 59 dollars by February 2021, reaching a 14 billion dollar market value, despite 117 million dollars in expenses, 238000 dollars in sales, and 273 million dollars in losses in 2020. The influencer later reaped 166 million dollars in profit by selling his shares while outsiders lost over 80 percent.

The phenomenon extends to established companies caught in speculative frenzies. Albemarle Corporation, a specialty chemicals producer, saw its stock surge 102 percent in 2020 and 58 percent in 2021, trading at over eight times sales and 218 times earnings by the end of 2021. This was driven by demand for lithium in electric vehicle batteries, despite its sales growth not matching the stock's parabolic rise. When a lithium glut caused prices to fall, Albemarle's stock dropped 7 percent in 2022 and 33 percent in 2023, returning to historical valuation levels. The speculative cycle perpetuates, as seen with VinFast Auto Limited in 2023, whose stock rose eightfold to a 190 billion dollar market capitalization (twice Ford and GM combined) in two weeks, having sold only 740 vehicles in the US and losing 7 million dollars a day, before falling over 90 percent in two months. These cases underscore that human nature, fueled by greed and disregard for fundamentals, remains constant in financial markets.