The ‘Roar’

A funny thing happened on the way to the car dealer the other day. We piled in to our threeish-year-old car with an expiring lease to go get another, newer version of the same car. The kids were worried the process would take too long, my wife was worried they would not have the color she wanted, and I was worried how much money was going to be extracted from our wallets. That is when the ‘funny’ thing happened. The salesman told us that none of our worries were going to come true - except mine, of course. They did not have the car we wanted, in any color, and, if we still wanted one, we had to special order it, wait months to get it and we will have to pay top dollar. Yikes!

 

After that, we discovered our cousins who recently had an expired lease wound up buying it out at the end from the manufacturer, which is almost never a good deal. However, they then proceeded to immediately re-sell it to another company for thousands more than they paid. The company that bought it planned to do the same.

 

Used car values cratered in the throes of COVID-19, so much that the car rental giant Hertz was forced to declare bankruptcy. Since then, used car values have not only recovered but skyrocketed to new highs. This is due to any number of reasons we hear about (chip shortages, supply chain disruptions, stimulus demand etc.). Regardless of the reasons, the whipsaw in values is a part of a greater question these days regarding what has value and what is valuable. This is not just about used cars - old notions have been shaken to their core.

 

Not known for their intrinsic value, we recently witnessed Bitcoin and cryptocurrency assets ascend to unheard-of heights only to watch them lose half their value in a month. Talk about difficult to price. The era of non-fungible-tokens “NFT” that now command millions, sorry, tens of millions, for a digital photo or video previously available for ‘free’ was completely unheralded but nonetheless has arrived.

 

Our old markets have diverted in the definition of value, too. Growth stocks and residential property have rallied with prices hitting new highs daily but value stocks and gold, long considered a ‘store-of-value’ asset, look relatively cheap. GameStop is a name you have most likely heard about. A ‘meme’ stock, as it is known; it trades based on popularity and sentiment on Reddit message boards, not on profits and growth. Old cars, fine wines, rare bourbons, heck, even Pokémon cards are scaling new heights. Somehow, with all this run-up, interest rates on US government debt remain near all-time lows and some European bond yields are still negative. What’s an investor to do?

 

Defining value is a central purpose of markets. Historically, the valuation of an asset in any market was driven by a set of relatively defined factors like location or cash flow in real property, or a variety of ‘multiples’ in publicly traded companies i.e. price to earnings or sales etc., with other factors like liquidity, growth rates, or intangibles like brand value, ‘moats’ surrounding the business etc. adding to the price. While these principles still exist today, a lot of newly created value has abandoned them. History has been generally unkind to self-pronounced new paradigms especially as they have related to value, intrinsic or not. But even with the current zaniness of markets new and old, we remain focused on the important job of helping our clients maintaining their good financial health. That is, paying attention to the financial risks we face, ensuring proper, personal allocations, diversification and, managing risk ongoing. While the returns look enticing of late, rest assured that we do not intend to start investing in used cars. Perhaps we should go for a convertible, though? Have a great summer!

Regards,

Scott Lasky, CFP™

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