Peter Hodson: When an investor goes against everyone in the world, they can make a fortune if they are right
Cathie Wood is calling for bitcoin to hit US$1 million. Photo by David Swanson/Reuters files We have to admit we kind of admire radical thinkers. Now, we are not referencing all the crazies out there, with their conspiracy theories and wild notions. No, we are only referring to the stock market: the radical investors who don’t care if they go against the crowd and don’t really mind being mocked for their views, which can certainly be out there.
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Why do we admire these investors? Because, when an investor goes against everyone in the world, they can make a fortune if they are right. Historical examples abound, with investors such as Warren Buffett stepping in to support financial companies when the world was imploding in 2008, or hedge funds taking giant bets against currencies and then making fortunes overnight when they proved smarter than central banks.
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Let’s take a look at some radical views some investors have right now, and strategies that might take advantage of them.
No recession We can’t think of a single economist who is not predicting a recession next year. Some expect a mild one, but others are calling for a 20-year decline. Yikes. But, as optimists like to point out, economists have predicted 50 of the past eight recessions. Nothing says we have to have a recession. Corporate earnings are decent and there are lots of jobs available. Maybe we get one, maybe we don’t.
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Article content But radical investors might want to get bullish since stocks — after a disastrous year — are cheap by many metrics — small-cap stocks especially so. Just think of the market rally we might have if analysts start ratcheting up their earnings forecasts, instead of down. Such a huge sentiment shift combined with higher earnings would mean some good times in the market. Contrarian investors might want to buy now.
Deflation is going to be the problem, not inflation For the past year, at least, the big bogeyman in the stock-market closet has been inflation. It is all that has been talked about. But some radical thinkers still think deflation will be more of a concern in the next decade.
Automation and artificial intelligence might keep driving down costs, leading to higher profit margins at companies. There has been huge interest in a real-life AI application called ChatGPT, which is being downloaded at a faster rate than Instagram and Netflix when they started. The program provides real-life solutions and answers and some are calling it the vision of the future, even a Google-killer, with solutions and coding made faster, and thus cheaper.
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Article content Maybe AI is what breaks inflation’s back. It is tough to invest directly in this (Google, for now, has said it will not offer such a service, fearing “reputational damage” because it is still just in development). But if AI can drive down costs, then lower inflation and higher corporate profits will be music to the ears of any investor who doesn’t believe that inflation is going to last.
Bitcoin to US$1 million Yes, we are referencing fund manager Cathie Wood here. In November, she once again reiterated her view that bitcoin is on its way to US$1 million by 2030. Sure, she might just be looking for headlines, as she is clearly not having any fun in this market with her flagship fund down 62 per cent this year. But we must admire how far she is sticking her neck out.
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Article content Bitcoin is barely at US$17,000, so she could have predicted a US$100,000 price and still garnered lots of attention. But no, she had to go big and go for the big million. It is a radical prediction for sure, especially given the constant cryptocurrency collapses, scams and frauds. But for those so inclined, we would be more than willing to wait seven years to see an investment of US$17,000 go to US$1 million. We’re not buying this theme, though.
Fusion is going to kill the energy sector Admittedly, this one is way out there. It was only days ago that fusion technology had a breakthrough that resulted in a net energy gain. The gain was minuscule, and we are decades away from a practical, commercial use of the technology. But with almost everyone in the entire world against fossil fuels, any technology breakthrough in energy production is going to get noticed.
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Article content As fusion develops, there will no doubt be lots of chatter about the end of oil. We are all for the environment, and fusion is a great solution for essentially unlimited energy, but this one is too far away. We certainly would not want to sell our energy stocks based on this theme.
Improved China/United States relations To say that tensions between the world’s two largest economies have been high would be quite an understatement. The U.S. is banning some technology from China, and potentially kicking out Chinese companies from stock exchanges, and most Chinese stocks have been crushed, though that’s due to COVID-19 lockdowns and a recession, as well as trade tensions.
To put it in perspective, an investor could buy Alibaba Group Holding Ltd. stock today at a price not far off its IPO price of eight years ago, even though it has earned a collective US$111 billion (market cap US$242 billion today) since then. The stock is down 71 per cent since its high of late 2020.
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Article content Most investors are writing off China for a while, with a botched COVID-19 strategy, civil unrest and an upcoming recession. But radical thinkers might say that China needs the U.S., and that tensions, once they abate, will mean Chinese stocks are very, very cheap.
Politics are always difficult to call. But many Chinese companies are still growing quickly and yet they are trading at 10 times earnings, indicating that many risks are already priced in. A thawing in relations could mean investors make some big gains.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
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