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Inside Investing with Ned Moore
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Ned's Notes


Investment Black Holes


Don't let a Supernova take out your portfolio
 

When the Hong King Stock Exchange closed for business on Wednesday, November 19th, a marble mining company named ArtGo Holdings Ltd, was the best performing stock of 2019 in the entire world (excluding smaller companies with market caps <$1B). An unlikely superstar, ArtGo’s stock had zoomed up nearly forty-fold (3,800%) just since January. 

The next morning, ArtGo exploded downward as if it had gone supernova, falling 98% in less than two hours while shedding $5.7 of its $5.9 of market capitalization. By the time authorities could halt trading, ArtGo's price had declined from $15 to a mere $0.04 per share.  



What happened? The day before, activist investors and media sources, including The Wall Street Journal, had brought ArtGo's rocket-like rise to the attention of regulators and index compiling organizations such as Morgan Stanley Capital International (MSCI). After reviewing ArtGo's "suitability for inclusion", MSCI reversed itself and announced it would not be adding the stock to any of its indices. That not-so subtle rebuke was all it took for investors to flee ArtGo like a dying planet.    

Of course, it has long been true that far east equity markets are more volatile than their US counterparts. So, it might seem reasonable to write off ArtGo’s sudden demise (as well the 90% plunge a company called Kasen International Holdings took the same Thursday) as just the risk of doing business in the former British colony. But that mindset would be ignoring our own recent history. Remember Enron or WorldCom? A mere twenty years ago both companies fell through a galactic worm hole almost overnight after accounting irregularities revealed they were not the celestial orbs they had been promoted as being.   

Just a few years ago, the NYSE-listed Canadian drug company Valeant Pharmaceuticals (VRX) shot through the stratosphere using borrowed money to finance the purchase of existing drug companies at exorbitant prices. Early investors made a lot of money - at least until its business model collapsed under charges of predatory pricing and accounting shenanigans. As the chart below shows, it utterly imploded and even the savviest were savaged. Hedge Fund magnate Bill Ackman reportedly sold out for a loss of $2.8 billion. The Sequoia Fund, once praised by legendary investor Warren Buffet, had staked over 30% of its $7 billion of assets in Valeant, and tragically held onto its position throughout the stock's asteroid-like plunge to earth. 


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Lest one write-off Enron or Valeant as outliers, the exploding dot com bubble sent the Nasdaq-100 (comprised of roughly but not exactly the 100 largest non-financial companies listed on the Nasdaq) tumbling in late 2001 to levels 78% below its prior peak. From there it took fifteen years for the once-dominant index to recover from its own reverse Big Bang. It almost seems like the more massive and hotter the star, the more likely it is to explode. Unfortunately, completely avoiding the hottest stars is no answer, because a substantial portion of almost any portfolio’s gain comes from the few stars that shine brightest (as recent biggest winners like Microsoft, Amazon, Google, or Netflix have done over the past decade). Rather, the answer is to spread your assets throughout the universe so that the inevitable supernovas and other galactic catastrophes are mere curiosities in the nighttime sky.   

 
Ned’s Note's Takeaway: One can’t reasonably hope to match (or beat) a given benchmark’s returns without exposure to some of the riskier corners of its universe. But, as history has shown time and again, stocks that become stars go down a lot quicker than they go up. To guard against this unavoidable reality, make sure you don’t get too extended by the gravitational pull of any one stock. Financial websites like Morningstar have tools available for analyzing portfolio exposures or, better yet, have your Financial Advisor do it for you.

 
Email with questions or comments: Nedmoore@bey-douglas.com
 
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Email with questions or comments:  Nedmoore@bey-douglas.com

Addendum: Ned's Notes is a proprietary newsletter created by none other than Ned. Feel free to forward it to others as you like but its contents may not be used for commercial purposes without the express consent of the author.  
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nedmoore@bey-douglas.com

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The information herein has been obtained from sources believed to be reliable; however, Bey-Douglas Investment Counsel ("Bey-Douglas") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Bey-Douglas’ judgment on the date hereof and are subject to change at any time without notice. Any statements that are nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Investors should be aware that any investment strategies presented may not be appropriate for every investor and should not be construed as investment advice or a recommendation of any specific security.  An investor should review with their financial advisors the terms and conditions and risk involved with specific products or services. As with all investments, past performance does not indicate future results. 
 






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