Rolling Bubbles

I just ran across an article on the recent collapse of the “emerging art” scene, which revolves around works by young artists, many still in their 20s.¬†An art dealer bought a work by a hot young artist for $100,000 back in 2014, and is now trying to sell it for $20,000, before it goes to zero. Here’s an excerpt from the article:

This week, estimates for three Smith pieces are as low as $7,000. One, from the series he made by spraying more than 200 canvases with paint from a fire extinguisher, is estimated at $12,000 to $18,000. A bigger spray work sold for $372,120 two years ago.

Who knew that one episode of spraying paint from a fire extinguisher could create art worth more than $74 million at the peak? If the nomination of Donald Trump was not enough proof, this seems like persuasive evidence of the apocalypse to me.

This is also a good reminder to every would-be speculator about the risks of buying any asset simply because it is going up, without regard for its intrinsic economic value. When bubbles burst, they do so without warning, and they can trap even the most sophisticated investors.

We have been defensive in our portfolio commitments for several years now. As a result, we’ve missed some of the apparently easy money, in emerging tech stocks in particular. Right now we’re observing a global tendency for some of the most over-inflated asset markets to head south. This broad decline has already affected some of Silicon Valley’s “unicorns,” the term for non-public companies valued at more than $1 billion, as well as real estate in recently red-hot markets like Vancouver, which was down as much as 17% in a single month.

When considering any investment, the two questions we always ask are:

Does this investment represent an underlying asset or business with real and enduring economic value?

Is the price I’m paying reasonable in relation to that underlying economic value?

If the answer to either question is “no,” our practice is to stay on the sidelines. This causes us to miss out on some apparently easy money, but also helps protect us from permanent and irrecoverable losses.

I’ve been in the investment business since 1978. Time and again, I’ve observed greedy individuals chasing over-priced nonsense, solely based on the fact that it has recently gone up. They always seem to believe there will be some sort of warning before the bottom falls out.

Let’s all consider ourselves warned.