Source: Platinum Portfolios Quarterly Newsletter (Q4 2023)
Google Search made its official debut on September 27, 1998, setting the gold standard for search engines. Since then, it has continuously innovated its search algorithm to meet the growing demands of users world-wide. However, for investors, identifying the next breakthrough search engine, much like Google, is no easy task. In the early days of search engines around 1990, investors faced a choice among approximately twenty options, including WebCrawler, Lycos, AltaVista, and Yandex. Many invested heavily in what was considered the latest trend, but only those who chose Google in 1998 emerged as winners.
Today, a similar trend is observed with the rush to invest in electric vehicle (EV) shares. Investors are on the lookout for the next “Google” in the EV space, reminiscent of the earlier search en-gine frenzy. However, recent challenges have hit EV startups hard, with many struggling to sur-vive.
A Wall Street Journal analysis revealed that at least 18 EV and battery startups, which went public in recent years, were at risk of running out of cash by the end of 2024. Companies like Nikola and Fisker, once promising, faced finan-cial difficulties due to rising costs and manufac-turing issues. Some, like Lordstown Motors, Pro-terra, and Electric Last Mile Solutions, even filed for bankruptcy.
Like past bubbles, inflated valuations and projections were common. Most struggling companies went public through special-purpose acquisition companies (SPACs), allowing unchecked growth projections. This highlights the risks of investing in trends without a solid foundation.
The analysis found that the median stock among these companies had plummeted more than 80% from its market debut, erasing billions of dollars in market value within a short period. The EV market, despite steady growth in demand, has not exploded as predicted. Established players like Tesla cutting prices to attract cus-tomers further pressure newcomers still grappling with production challenges.
Investors, often influenced by sentiment and familiarity bias, tend to trade on “noise” rather than information. Following the herd can lead to significant losses, as demonstrated by the struggles of many EV startups. As fund managers, we recognize the need to avoid fashionable investments and focus on companies that meet our requirements and process.
Buying shares based on what’s popular around social gatherings like braais or golf courses is not a reliable strat-egy for generating returns. We prioritize investing in sensible businesses that align with our clients’ financial goals. Our approach is disciplined, staying within our circle of competence, and emphasizing the power of consistent compounding of returns over time.
Warren Buffett’s reminder of the losses in the airline industry’s assured growth in the early 19th century resonates with the recent EV craze. We aim to learn from history and avoid investing in trends that appear too good to be true. Our conservative approach, investing alongside our clients, is grounded in the belief that consistent compounding will lead to good long-term growth.