by Michael Schmanske, Chief Investment Officer – AngelMD
I’ll keep this short. Mostly because this is a big, deep and complicated subject; so rather than explain the math behind it, I’m going to cut to the point and follow up with some AngelMD Academy Classes in the Spring. Here we go…
This has been repeated ad nauseum by educated analysts who should really know better.
Speculative Tech stocks have gone down a ton in the last year since interest rates started going higher. Therefore, tech stock valuations must be highly responsive to interest rates…
What they should be saying is.
Speculative Tech Stock prices are highly sensitive to speculative risk appetite. And that has fallen in the last year.
The very first thing that gets affected by tightening monetary policy is speculative appetite, by design. If investors had been speculating in Home Builders and Banks (2008), Energy companies (2014) or Leveraged Company roll ups (Tyco and Enron – 2002) they would have been the sectors most affected. And they were, in each of their respective cycles. It doesn’t hurt that all of those sectors are actually highly sensitive to interest rates.
This time around it wasn’t just interest rates. The government stimulus was distributed directly to bored stuck-at-home retail investors. But retail investors were speculating in fringe tech companies because they are far more fun and understanable than JP Morgan or Exxon Mobile; Crypto currencies, Covid-Darlings, NFTs and Meme stocks fit the mood of the moment.
Shockingly enough, they have ALL gone down in lockstep. It amuses me to see the same analysts that try to explain tech valuations via long-term cash flows, attempt to reconcile the correlation to assets like crypto currencies that have zero potential for any cash flow. Fiscal stimulus stops in November 2021 = Peak of speculative tech November 2021. Rates go up starting in March, and the rest of the market follows.
Does it matter? Only if you care about the difference between correlation and causation.
Key Takeaway: some knowledge you can use:
Speculation is not valuation. Make sure you use the correct instrument to analyze each type of asset.
One crazy bit about early stage investing is that it feels like the former but is actually heavily biased to the latter. Don’t believe me? The vast majority of early stage companies achieve an exit via direct full company acquisition – the very definition of value investing.
And yes, this topic just got added to the Spring Curriculum on AngelMD Academy. Don’t have a CFA? Don’t worry, we’ll get you dialed in.