Superbubbles – The EMH is flawed and the monkeys have stopped throwing darts!

Memo: To myself and whoever is interested in a view that maybe different

In now a classic, Burton Malkiel in his book Ä Random Walk Down Wall Street”, he wrote “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

No amount of reality checks in the spread of SARSCoV2 globally and rising, or the show of inequality in the Black Lives Matter movement or other such movements across the world, or the impact of destruction of entire ecosystems and the impact on climate change, that people have stopped to think of what comes next? Yet everyone seems to invest in companies whether they have no value or even bankrupt!


Many months ago the monkeys stopped throwing darts when companies valuations across stocks markets without exception have been a clear demonstrator of why the Efficient Market Hypothesis is flawed. With the entire world due to SARSCoV2 in dire straights, no or low demand, Cash Conversion Cycles increasing due to DSOs increasing from 30d to 120d and counting, fuelled by FOMO/Greed/free money or “0”cost capital or borrow and may not be able to return from central banks, PE multiples of companies defied logic and Margins of Safety have hit record lows, creating the perfect storm for what we call a “Superbubble“.

We have consistency maintained that this is the greatest opportunity where smart money understands the piranha feeding frenzy and creating the greatest shorting opportunities, like Bill Ackman’s trade.


Any news of vaccines for the SARSCoV2 seems to move stock prices and drives the feeding frenzy when everyone know even the fastest vaccine ever took over 4 years. In addition the huge uncertainty of vaccines developed with the medium to long term side effects such as on the immune system or other side effects will be only known over time. https://www.historyofvaccines.org/content/articles/vaccine-side-effects-and-adverse-events An executive I spoke with said, “unless I am insured for a large amount for any side effects I am uncertain about taking a vaccine. Will the government or the pharma company provide that insurance?” It is these uncertainties of behaviour and rationale that point to the uncertainties ahead.


As we continue to look at the stock markets globally the DJIA, NASDAQ, FTSE, NIKKEI, KOSPI, BSE/NSE, all have incredible over leveraged companies and PE ratios so far ahead that it is clear that a massive sell off on fundamentals is inevitable.

From the FAANMG stocks to Telsa to companies in China, Europe, Asia, India, et al the massive rallies are clear that with all information of no revenues, over leveraged balance sheets and the SARSCoV2 will not stop in the near term even with a vaccine on the horizon, investors of all hues have joined in to feed the bubble.

The Margins of Safety across so called highly valuable companies are at record levels below value investing parameters and if that is so obvious and can be got for free why are investors continuing to invest even when this information is known to all? The EMH falls flat once again here.

In addition look at two different industries, EV and telcos. Investors are going overboard knowing the fact that the value creation, capture and distribution (we call this the Value Stream thesis) is very low and yet investors continue to pour in capital in the hope that the future will be great.


Tesla is not alone. Almost every company on the DJIA/NASDAQ is the same or worse off. Stock buy backs from 2013 to 2019 have of over $4.6T exceeded the entire FCF of these companies! This has been the driver for stock growth across the vast majority of these companies who now look more like Wall Street money managers rather than core main street businesses.


Look at the telcos who suffer from what we call the “Law of Compounding Depreciation”, where the Edholm’s Law like Moore’s Law states that bandwidth doubles every 18 months at the same costs, rendering a Compounding Depreciation effect on telcos of a -33% pa. This explains why telcos are always in debt due the ration of value captured/compounding depreciation is less than 1.

Look around and one sees that telcos while distributing a lot of value like oil pipes or a trucking company or airline capture low value. Would you pay a percentage of your £100m deal that you just completed just because you made a phone call or conference call or took an flight to close the deal? I don’t think so.

The effect? Globally all telcos will reflect a high HHI and the Rule of 3 applies due to the high gearing arising from the law of Compounding Depreciation.

While these pipes and towers continue to distribute value and act as force multipliers like a road highway to the economy.

It is the companies with deep IP and capability to capture value created that go OTT to leverage telco capex of pipes & towers to really come out winners.

Two different industries and with two vastly different businesses, business models and yet have many similarities. The result being the Red Queen Effect of having to run just to stand still.

What is most excruciating is to witness millions of individuals witness yet another bubble accelerated by behaviour of Person+Machine (Algos) alike, to continue to invest their savings or free cash and most their only remaining equity into companies who by sheer financial engineering, poor behaviour of executives and boards have witnessed a massive growth in their stock prices. Adding fuel to fire is analysts and media challenges and sites with their constant information overload and “nudging” investors on what the potential may be creating the FOMO bias have further contributed to this massive superbubble, which will take years to unwind, creating new opportunities.

Various central banks across globally have stepped into try and address this SARSCoV2 induced challenge to a previous decelerating revenue growth of both companies and economies of an old playbook of providing liquidity (largely to sell side) not demand side. This will witness the compounding erosion of value which should take between 3 to 5 years at the minimum to achieve what they could have in 2020 alone. Unless executives and boards step in and governments create new a new playbook to deal with a new wicked problem, a lot of value will be eroded further and lead to creative destruction on a scale not seen in over a 100 years.

It’s time to watch all the famous movies of greed all over again and watch the 2.0 come alive in a while.

The monkeys have stopped throwing darts as everyone is throwing darts at the moment and there is no space to do anything else except wait.

Probably the greatest thesis ever in the history of behavioural finance, no single fund manager has ever done what John Bogle did for the individual investor. This created the opportunity for the masses to be part of this vast economic and financial engine of the stock market as index investors and today over 50% of all equity invested.

The need for a a new theory of the rational pricing of an asset and a new theory of behavioural and financial economic models are way overdue. Stay tuned!

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