Keynes on Irrational Markets… Learning from Legends

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“The market can stay irrational longer than you can stay solvent.”

This is a very well known investing quote from John Maynard Keynes and one that, despite being around a very long time, still tends to often get ignored.

You may see a stock that has lost a lot of value or one that has gained a lot in value. Valeant Pharmaceuticals and Tesla are two stocks that come to mind. When Valeant fell from over $250 per share down into the $70s many thought it was a great deal, a value play, including some of the best minds on Wall Street. The stock since traded under $10 and is bouncing around in the $13’s after a different hedge fund manager has gotten involved and joined the board.

Tesla is burning cash, diluting existing shareholders through continuous capital raises and has failed over and over again at meeting promises made by the founder of the company. Over the past couple of years, the stock has traded from around the $40s in 2013 up to a recent $375 despite high short interest (that is investors betting that the stock will fall) and the issues I mentioned above.

I am not saying either of the above companies are buys or sells. I am just making the point that many investors with strong convictions have lost significant sums of money betting Valeant would rise in value and Tesla would fall in value. Both may happen at some point in the future, but many of those early investors would have been wiped out by their losses by then.

It is as dangerous being early as it is being late. Again, this is why I stress that there is a big benefit in separating out your investments for your financial goals such as purchasing a new home, retirement and your kids’ education, and your speculations. The former should be invested in a diversified portfolio of index mutual funds or exchange-traded funds, while the latter can be used for pure speculation where losses won’t impact your most important financial goals.

If you haven’t reviewed your investment holdings for some time you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.

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