The renewed interest in 2024 by some investors in Bitcoin and ‘meme stocks’, has brought back memories of the more speculative pockets of the market in 2020 and 2021. Three years on, with the dust having settled, what can we learn?

The depth of the Covid-19 pandemic coincided with a spike in investor enthusiasm for the share market and cryptocurrencies. The combination of mobile trading apps, government and central bank stimulus, and a rampant stock market captured the attention of millions of new investors.

The frenzy of activity and media coverage included not just cryptocurrencies and meme stocks, but also non-fungible tokens (NFTs), special purpose acquisition companies (SPACs), and a love of early-stage growth stocks – embraced notably by Cathie Wood's ARK Innovation Fund. The excitement attracted many new investors into the fray, utilising mobile trading apps such as Robinhood and Coinbase to get in on the action.

These speculative parts of the market slumped with broader markets in 2022 – and some dramatically so. But with the dust now settled, and most share markets having recovered, let’s see how these areas of the market have fared.

Investor excitement, against the backdrop of a pandemic

The S&P 500 was up 18% in 2020, and another 29% in 2021. Hot share markets globally were driven by the loose monetary settings of central banks, which made it easier for speculative investments (e.g. companies with little to no track record) to attract capital.

The ARKK ETF, run by Cathie Woods (who was widely followed by many new investors), was up 150% in 2020. Some of the fund’s top holdings – in areas like genomics, 3D printing and digital payments – were Roku, Materialise, CRISPR Therapeutics, Twist Biosciences and Block.

Crypto took off – and not just Bitcoin. Thousands of new coins appeared. Bitcoin was up 305% in 2020 and was joined by Ethereum which had an even more impressive run – up 475% in 2020. It seemed every day a new coin was being launched, including fan favourites Dogecoin, Shiba Inu, Cardano, and Solana.

NFTs, which can be thought of as digital trading cards that represent art or images, had a bonanza. For example, a bundle of ape images from Bored Ape Yacht Club sold at a Sotheby’s for US$24m. One of the most expensive NFT’s to ever sell was from Beeple, who sold a NFT through Christies for US$69m. Prior to this, the most Beeple had ever sold a print for was US$100.

Meme stocks were embodied by GameStop, AMC Entertainment (the cash-haemorrhaging cinema chain) and Hertz. These were companies that had challenging business models, and were often on the verge of bankruptcy. Large professional investors were taking big bets against these companies on fundamental grounds. But retail investors organised themselves to drive the share prices artificially higher. GameStop’s shares rose over 280% in 2020, squeezing professional investors with short positions.

It appeared to some that a new era had begun in which fundamental qualities of assets had no correlation to their value. What could go wrong?

The fallout

Fast forward a few years and how has this all played out?

While Bitcoin has shown some staying power and is trading close to its 2021 highs, many other coins have turned out to be worthless. Since their peaks in 2021, Dogecoin is down 76%, and Cardano is down 86%. Some of the key crypto currencies have ended up defunct.

NFTs have also had a tough time. The Bored Ape images are now reportedly only worth $40-60,000, about 80%-90% lower than where they were selling during the peak of 2020 and 2021.

Meme stocks have also cratered in value. Hertz was placed into bankruptcy and has since re-emerged, but its shares are down 85% since it relisted in the middle of 2021. AMC Entertainment shares are down some 99% since their peak in 2021. GameStop stock is 72% off its highs from 2021, despite a recent resurgence.

Meanwhile, the US S&P 500 Index is 14% above its high point from 2021.

Periods of excess and easy money can lead to undisciplined investing and a lack of diligence by investors. The fear of missing out takes over, and everyone wants to get rich quick.

ARKK’s long-term performance

Of all the speculative activity, ARKK was perhaps the ‘least speculative’ as it invested in real businesses. These businesses often employed cutting edge technology, with real (albeit over-hyped) growth prospects. But it has also struggled in the wake of 2020 and 2021.

Since its peak in early 2021, ARKK is down 72%, even after a 78% gain in 2023. Over 10 years, ARKK has underperformed the S&P 500, with a total return of 129% vs 212% for the S&P 500.

All the excitement around these new sectors tends to mean these stocks become overvalued.

No doubt there will be a few big winners in areas like genomics, the metaverse and telehealth, but history would suggest trying to pick these winners is extremely difficult. The losses on the long list of investments that don’t work out can easily outweigh gains on the few winners.

Boring can be beautiful

While it may be exciting trying to bet on the next big thing, this does not typically work for most people over an extended period of time. To have a successful investing journey, sometimes it pays to wait till the winners have been found.

Mastercard and Google are two examples of this. Google certainly wasn’t the first search engine. There were dozens that came before it, and many went bust in the aftermath of the dotcom bubble. Waiting a few years until Google was the dominant player in online search didn’t cost investors much. This had happened by the time Google listed on the Nasdaq in 2004. Google shares have materially outperformed the market since then, increasing in value over 80-fold (over 8,000%) since its Initial Public Offering (IPO), compared with a 7-fold gain for the S&P 500 over the same period.

Similarly, Mastercard was already very well known, successful, and its story well understood at its IPO in 2006. Mastercard has gone on to significantly outperform the market since then, increasing in value 100-fold (over 10,000%), compared with a 6-fold gain for the S&P 500 over the same period. These two companies have created enormous wealth for shareholders over the long term, despite being well known and well understood businesses.

Strong returns don’t have to come from being at the very leading edge of technology. Sometimes boring can be beautiful.

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