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Warren Buffett has done a great in the past highlighting the risks of investing in frothy sectors. The lessons apply to investors in stocks like Tesla (TSLA), NIO (NIO), Fisker (FSR), and Xpeng (XPEV).
Every bull market has different themes in regards to technology, demographics, geopolitical considerations, and government policy. However, they do tend to follow the same emotional trajectory – from fear to greed. In a way, it’s similar to how every hit song is unique but follows the same general structure in terms of its progressions, chorus, and themes.
Bull markets also tend to focus on certain industries that consist of stocks with huge valuations based on projections about future performance and market size. Currently, electric vehicles (EVs) are one such example. Despite the KraneShares Electric Vehicle and Mobility ETF (KARS) being down 20% over the past 2 and a half months, it’s up 150% since the March 2020 lows.
Given the industry’s high valuations, it’s not surprising that value investors, like Warren Buffett, aren’t currently interested in investing in EV stocks. Although Buffett hasn’t commented too much on EVs, he did extensively discuss the massive risks of the dot-com bubble in Berkshire Hathaway’s (BRK.B) annual shareholder meeting last weekend. And, there are many similarities between the late 1990’s and now. Thus, I believe investors in stocks like Tesla (TSLA), NIO (NIO), Fisker (FSR), and Xpeng (XPEV) should consider Buffett’s previous insight on the subject.
Bezos and Buffett
During the 1999 Sun Valley Conference, Buffett called the bull market in technology stocks a bubble and compared it to other bubbles that previously burst, like airlines and auto stocks.
“Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: … All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? … we came down to three U.S. car companies–themselves no lollapaloozas for investors.
The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane… So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today.
Move on to failures of airlines. Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
Of course, this quote took place with many tech leaders in attendance while Buffett was viewed as someone who “didn’t get” the Internet. The attendees included Jeff Bezos, the founder and CEO of Amazon (AMZN) who took it as a warning sign that his company’s success was by no means guaranteed.
It’s probably not a coincidence that Amazon managed to survive the dot-com crash and then thrive while many dot-com stocks didn’t survive.
In an article about Amazon a few months later in Fortune Magazine:
Bezos said of the speech: “When new industries become phenomenons, a lot of investors bet on the wrong companies,” [Referring to Buffett’s 70-page catalog of mostly dead car, airplane, airline and truck makes] “I noticed that decades ago, it was de rigueur to use ‘Motors’ in the name, just as everybody uses ‘dot-com’ today. I thought, “Wow, the parallel is interesting.”
Bezos says, “Buffett’s analogies about bankrupt businesses ‘resonate deeply.’ Now Bezos is spreading the gospel according to Buffett and urging Amazon employees to run scared every day. “We still have the opportunity to be a footnote in the e-commerce industry,” he says.
What EV Investors Should Consider
The bubble that exists in the EV industry will probably play out in a similar way to previous industry bubbles. The overall EV market will grow but only a handful of companies will probably emerge as winners.
There are many similarities to the previous bubbles in that there is so much new supply that is being absorbed at high valuations. Many of the companies don’t have significant production or are still in product development mode. These types of companies can only typically IPO in frothy markets.
It’s also likely that most will fail due to the difficulties of scaling production, increasing distribution, and becoming profitable. All of these are difficult tasks that companies even with billions in the bank and decades of experience routinely fail at.
So, EV investors take note of this important lesson from the Oracle of Omaha. Though the EV industry will surely continue to see impressive growth, it’s likely many of the EV companies with sky-high valuations today won’t exist within a decade.
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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com. Jaimini has been dialed into the hottest trends in investing:
- Electric Vehicles
- Internet of Things
- Cloud Computing
- And Much More
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TSLA shares . Year-to-date, TSLA has declined -4.54%, versus a 11.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.
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