In a previous post and video, we explained why we thought this was a particularly difficult time for investors. The core of the problem is the low interest rates on high-grade, fixed-income, securities. Those securities are the foundation upon which all investment returns are based. It is the amount of money you can expect to earn by lending funds to a high-grade borrower with a contractual obligation to pay you back with interest. The safest U.S. borrower in that regard is the United States Treasury which currently promises to pay a rate of 1.61% on 10-year Treasury bonds. Meager as that it is, it is better than the yield on 10-year German bonds which is currently -0.70%. Investors have to pay the German government interest for the privilege of lending it money.
In such an environment, it is not surprising that investors, particularly those who hope to live off their portfolios, are hunting desperately for higher rates of return. As part of such a hunt it is not surprising that many are attracted to what we called “Bubble Stocks” in a previous post. And why not? In the year to date, the returns on two of those bubble stocks have been stratospheric. Roku has quintupled and Shopify is more than tripled. And there are other tech high fliers out there as well.
At Cornell Capital we fear that adding such stocks to one’s portfolio is likely to result in a toxic brew. While it is true that bubbles can keep on bubbling for some time, they can also pop resulting in devastating losses. In our view, given the current level of prices, the risk of the later far outweighs the benefits of the former. In later posts, we will describe what we think is a better way to respond to the current difficult environment rather turning one’s portfolio into a toxic concoction. For now, we reiterate our warning to avoid the temptation to buy such stocks.