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Sam Sivarajan holds a doctorate in behavioural finance and has led wealth-management teams at several of Canada’s largest financial institutions. His latest book, Making Your Money Work: The Secrets to Financial Health, has just been published. For more information, visit

Warren Buffett famously said that, “Only when the tide goes out do you discover who’s been swimming naked.” Well, the tide has gone out. All the major indices are down this year, despite having bounced upward from their lows in recent weeks.

But, if you look elsewhere, the story is much worse. Bitcoin is down almost 50 per cent this year. One of the biggest bitcoin bulls, Michael Saylor, the chief executive officer of MicroStrategy, bet billions and lost, stepping down in the process. Celsius, a new cryptocurrency bank with 1.7 million customers and US$20-billion in assets, recently filed for bankruptcy. Robinhood, the commission-free trading company that profited hugely from the COVID-19 lockdown and the crypto craze, is down more than 40 per cent this year, lost a third of its customers and recently laid off a quarter of its staff.

What do all these companies have in common? While they touted new technology, showcased a charismatic founder, and/or had an interesting origin story, the biggest common factor is the level of hype surrounding the companies’ offerings.

That was also the case with WeWork, the onetime darling of the shared workspace sector backed by big names, which went from a peak valuation of US$47-billion in 2019 to its last valuation of just under US$3-billion in 2020. It was essentially repackaging commercial leases – something that other companies have done, and continue to do, profitably without the hype or the sky-high valuations. Peloton, an at-home alternative to gyms, profited from COVID-19 lockdowns and reached a high of US$120 a share. Today it is about US$14.

Retail investors and social media, not to mention investment professionals, ran with the story from WeWork and Peloton that the future was limitless and that they were getting in on the ground floor. The other thing these firms have in common is no profits – the hype increased valuations and, sometimes, revenues, but produced no earnings.

Profits do matter, or at least a visible path to profitability – after all, unless you are relying on dumping your investment on some poor, unsuspecting future investor, it is profits through which stocks get valued. Rising profits lead to rising valuations.

Benjamin Graham, the father of value investing and Mr. Buffett’s mentor, said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” What he meant is that popularity drives the market in the short run, but sooner or later fundamentals take over – this is when the tide goes out and investors can see what they have really invested in.

Research from the dotcom era showed that companies that added “.com” to their name experienced a 74-per-cent price increase in the five days before the name change was announced to the five days after the name change. Why does the hype attract investors?

Behavioural finance has some answers. Social proof is a big factor in investing. Research has shown that individuals are more active investors when their local community is more active, Wall Street analysts cover new stocks when peers launch coverage, and media coverage of stocks and stock recommendations strongly predict retail trading behaviour. Social media hype leads investors to believe that everyone is investing and leads to a fear of missing out.

The adage, “If it sounds too good to be true, it probably is,” might be a good reminder for investors. When a crypto startup that has no earnings is paying Hollywood heavyweights and music celebrities to hype it up, something looks odd. Cynically speaking, it’s nice of celebrities to let us in on their deals, but how did we get so lucky to share in this good fortune?

A few things are true about hype cycles – there are always some big winners and, unfortunately, there are many smaller losers. And the next hype cycle is always just over the horizon – indeed, a little-known Hong Kong fintech, AMTD Digital, soared more than 21,000 per cent in the two weeks after its initial public offering in mid-July. Despite a recent sell-off, the company is still worth about US$40-billion today despite only recording US$25-million in revenue in 2021. The company announced its “metaverse” platform in February with no details. The company was also shocked by the crazy rise in price, “To our knowledge, there are no material circumstances, events nor other matters relating to our company’s business and operating activities since the IPO date.”

John Bogle, the founder of Vanguard, said, “There is almost no limit to the ability of investors to ignore the lessons of the past.” The past shows us that buyer beware is never more applicable than when dealing with stocks that rely on hype over fundamentals.

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