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 market has different themes with regard to technology, demographics, geopolitical considerations, and government policy. However, they tend to follow an equivalent emotional trajectory – from fear to greed. In a way, it’s almost like how every hit song is exclusive but follows an equivalent 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 curious about investing in EV stocks. Although Buffett hasn’t commented an excessive amount of on EVs, he did extensively discuss the huge 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 think investors in stocks like Tesla (TSLA), NIO (NIO), Fisker (FSR), and Xpeng (XPEV) should consider Buffett’s previous insight on the topic .
Bezos and Buffett
During the 1999 Sun Valley Conference, Buffett called the market in technology stocks a bubble and compared it to other bubbles that previously burst, like airlines and auto stocks.
“Well, i assumed it might be instructive to travel back and appearance at a few of industries that transformed this country much earlier during this century: automobiles and aviation. Take automobiles first: … altogether , there appear to possess been a minimum of 2,000 car makes, in an industry that had a fantastic impact on people’s lives. If you had foreseen within the youth of cars how this industry would develop, you’d have said, “Here is that the road to riches.” So what did we reach by the 1990s? … we decreased to 3 U.S. car companies–themselves no lollapaloozas for investors.
The other truly transforming business invention of the primary quarter of the century, besides the car, was the airplane… So I went back to see out aircraft manufacturers and located that within the 1919-39 period, there have been about 300 companies, only a couple still breathing today.
Move on to failures of airlines. Here’s an inventory of 129 airlines that within the past 20 years filed for bankruptcy. The key to investing isn’t assessing what proportion an industry goes to affect society, or what proportion it’ll grow, but rather determining the competitive advantage of any given company and, above all, the sturdiness of that advantage. The products or services that have wide, sustainable moats around them are those that deliver rewards to investors.”
Of course, this quote happened with many tech leaders attending while Buffett was viewed as someone who “didn’t get” the web . The attendees included Jeff Bezos, the founder and CEO of Amazon (AMZN) who took it as a wake-up call 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 then thrive while many dot-com stocks didn’t survive.
In a piece of writing about Amazon a couple of months later in Fortune Magazine:
Bezos said of the speech: “When new industries become phenomenons, tons of investors back the incorrect companies,” [Referring to Buffett’s 70-page catalog of mostly dead car, airplane, airline and truck makes] “I noticed that decades ago, it had been obligatory to use ‘Motors’ within the name, even 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 consistent with Buffett and urging Amazon employees to run scared a day . “We still have the chance to be a footnote within the e-commerce industry,” he says.
What EV Investors Should Consider?
The bubble that exists within the EV industry will probably play call at an identical thanks to previous industry bubbles. the general EV market will grow but only a couple of companies will probably emerge as winners.
There are many similarities to the previous bubbles therein there’s such a lot new supply that’s being absorbed at high valuations. Many of the businesses don’t have significant production or are still in development mode. These sorts of companies can only typically IPO in frothy markets.
It’s also likely that the majority will fail thanks to the difficulties of scaling production, increasing distribution, and becoming profitable. All of those are difficult tasks that companies even with billions within the bank and decades of experience routinely fail at.
So, EV investors note of this important lesson from the Oracle of Omaha. Though the EV industry will surely still see impressive growth, it’s likely many of the EV companies with sky-high valuations today won’t exist within a decade.