Thousands of years ago, small bands of humans used to sit around the campfire and exchange tales of bravery, passion and vengeance. In some ways, humanity never outgrew those mythical accounts and ancient epic poems. This is rarely more evident than when observing how investors in today's equity markets flock to story stocks.
A story stock is a publicly traded company with a compelling narrative that explains why it is growing quickly. The very best story stocks leverage this plot into capital market access, where they issue billions of dollars worth of stocks and bonds to fuel their corporate ambitions. Right now Amazon, Netflix and Tesla are excellent examples of some of the most irresistible story stocks of our time. But while the sizzle is always great with story stocks, oftentimes the steak is missing.
When people invest in equities, what they are really doing is buying future cash flows in the form of earnings and dividends. Even though the narrative surrounding each individual story stock might be unique, the end product that all investors want - cold, hard cash - is actually a commodity. Ultimately, it doesn't matter whether an investor gets future stock market earnings from the latest and hottest technology company or from distinctly unsexy stocks in the trucking, mining or utility industry. To any rational investor, a dollar's worth of cash flows is a dollar's worth of cash flows, regardless of where it originates.
What usually happens when investors get suckered into buying story stocks is that the fabled companies fail to live up to their own mythology. This is especially the case during stock market bubbles, when investors' greed-filled imaginations run wild. Bubbles are exactly the time when story stocks are not only at their most seductive, but also at their most dangerous.
For example, during the original 1999 internet bubble there was a company called Juniper Networks. This company was one of the classic story stocks of the era. Its business centered on the production of networking hardware and software - critical tools used to power the early internet. According to the prevailing zeitgeist of the time, the future belonged to these internet infrastructure companies. And Wall Street enthusiastically agreed with this assessment. Juniper Networks nearly tripled from its IPO price on its first day of trading and was often treated as one of a select group of "must own" stocks for any savvy, forward-looking investor.
Although the fantasy spun around the company was a good one, it wasn't enough to keep this story stock afloat. Juniper Networks' stock price peaked at $232 on October 20, 2000. Today, in January 2018, Juniper Networks stock trades at a meager $28 per share. The company's price-earnings ratio declined from a nosebleed 473 at its 2000 high, to a rather pedestrian 16.6 currently. Investors who chose Juniper networks as one of their story stocks are still sitting on 87.9% losses to this day, 17 years later!
This is the omnipresent danger with story stocks. The fantasy might be alluring, but at the end of the day, all investors really want is for their investments to spin off lots of cash. And cash flows simply don't care about the story.
Now I'm not opposed to a good tale. After all, much of human identity and society is driven by myths, legends and sagas. But as an investor, I think it is imperative to know when to embrace the narrative and when to demand cold, hard facts. When dealing with the stock market, I very much lean toward facts rather than pleasant fictions.
However, there is one class of assets where history, anecdote and adventure are not just acceptable, but truly desirable. I’m speaking, of course, about fine art and antiques. These alternative assets have been pursued, hoarded and coveted by the wealthy and powerful for centuries. And this is because they fulfill deep-seated psychological needs, including the need for a good story.
Edvard Munch's famously unsettling painting, The Scream, is a good example of how a story can enhance a work of art, propelling it to the status of a cult classic. According to Munch, his inspiration for painting this masterpiece was as follows:
"One evening I was walking along a path, the city was on one side and the fjord below. I felt tired and ill. I stopped and looked out over the fjord - the sun was setting, and the clouds turning blood red. I sensed a scream passing through nature; it seemed to me that I heard the scream. I painted this picture, painted the clouds as actual blood. The color shrieked. This became The Scream."
That is powerful commentary! It is easy to see how this description builds a compelling myth around The Scream, elevating the painting to a status that it probably wouldn't hold otherwise.
Of course, it isn't just priceless artworks that benefit from a good origin story. Far more affordable art and antiques also become more interesting and desirable when their history, provenance and legends are known.
For instance, in 1954 between 200 and 300 gold Brazilian 12 guilder coins were restruck at the Sao Paulo Exposition Numismatic in commemoration of the city's 400th anniversary. The original coins are steeped in history, having been minted in 1645/46 in the Dutch-occupied, Brazilian port city of Recife. At this time, the Dutch West India Company had seized a large portion of the Portuguese colony of Brazil for its sugarcane resources. These beautiful gold coin restrikes deftly position the tumultuous history of 17 century Brazil and early-modern European colonialism against a mid 20th century Latin American backdrop.
It is a great story, and one that should be compelling to any coin collector or investor. Yet, these pieces of Brazilian-Dutch numismatic history currently sell for ridiculously low prices right now - a mere $604 in this case. And almost half of that price is attributable to the gold content of the coin!
However, I don't expect this situation to persist forever. Eventually this romantic tale will gain a wider audience. And when it does, prices for Brazilian 12 guilder restrikes (and probably the originals as well) will inevitably rise.
I like stories. But I think investors need to be very careful about investing in them. There are some asset classes where stories make sense and others where they don't. There's a reason you've never heard of the term "story bonds"; likewise, story stocks rarely make much sense for long-term investors. All too often, those fabulous tales of perpetual and limitless future growth end up being disappointing mirages.
Happily, more narrative-oriented investors can always rely on fine art and antiques. Their history and myth builds a foundation of desirability that appeals to even the most hard-nosed connoisseur. Fine art and antiques are one of the few asset classes where a good tale is worth the price of admission!
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