I attended a presentation on the eSports industry a few weeks ago.
For those not familiar, eSports is professional video gaming. Guys (mostly) who used to play video games alone in their basement, still play video games alone in their basement, but now make some serious coin doing it. Apparently, more people watch (yes, WATCH) eSports than watch Major League Baseball. In a few years, I was told, eSports will eclipse the audience of the National Football League.
As I stared at their PowerPoint presentation showing various columns moving astronomically higher, I was reminded of how often I’ve seen the same presentation. Different metrics, different industries, but always the same charts dazzling the audience with breathtaking growth rates.
I could have been at a presentation on robotics, genomics, e-cigarettes, 3-D printing, solar power, cyber security, healthy lifestyle (avocados!), nanotechnology, blockchain, cannabis, online gambling, electric vehicles, self-driving vehicles, the circular economy, smart homes…and on and on. Years earlier it would have been presentations on the oil sands, rare earth metals, income trusts or China.
Last month, I had a client contact me suggesting that we invest in plant-based food companies (“huge growth”). And then, just a few days ago, I got this email from a start-up seeking, of course, moolah:
The company is raising $2m now and $4 million concurrent to a RTO [reverse takeover]. They’re cash flow positive, will be profitable in November and have great momentum as they continue to sign up school districts to facilitate the buying of tickets to local events such as football, basketball, prom, etc.
That’s right, this company’s business model is, in part, taking a cut of high-school prom ticket sales. Once again, the growth opportunity is spectacular.
So, there are literally waves upon waves of speculative, theme-based investment ideas. The pipeline is endless and all of these companies promise the same thing: mind-boggling growth.
Naturally, some of these niche, theme investments work out spectacularly well (for example, it turns out that the Internet IS a big deal). But many don’t, at least not so far. Here’s the bath (or round-trip) you might have taken in the past couple of years in robotics, 3-D printing or cannabis. Incidentally, I could have shown many more examples. An investment in nanotechnology, for instance, has become just that—nano—with most related ETFs and indices having been liquidated or discontinued in recent years.
Robotics: growth potential doesn’t mean investment returns
Source:Bloomberg; Global X Robotics & Artificial Intelligence ETF (BOTZ) 2-year price chart
3-D printing: growth potential doesn’t yield investment returns
Source: Bloomberg, 3D Printing ETF (PRNT) 2-year price chart
Cannabis: growth potential doesn’t equal investment returns
Source: Bloomberg, Horizons Marijuana Life Sciences Index ETF (HMMJ) 2-year price chart
The point is you can’t pretend to know which of these niche investments will fail or succeed, or certainly not how to correctly time all of them. And, if you were only drawn to the PowerPoint charts going up to the sky, you’d have put your money into all of them. But the amount of research effort required to truly discriminate the good from the bad is enormous and, even if the due diligence could be conducted thoroughly in every case, the timing risk would still remain incredibly high.
It’s much more practical to build a portfolio with diversified, high-quality assets positioned across many geographies and many industries. And, equally important, to hold assets that have long and readily available trading histories. An extensive trading history is one of the best ways to identify the long-term risk and determine inflection points. With a long trading history, volatility becomes more transparent and predictable, and entry points easier to establish.
So, was it kind of fun to sit in that eSports presentation and learn about what will be driving the attention and interest of 18-25 year olds who use terms like ganking, zerging and jungling? You bet.
But would I ever directly invest our clients’ money in eSports? Never. I’ve been burned by too many sexy growth charts. And with zero trading history, it’s a blind gamble.
To paraphrase Dwight Eisenhower: It’s good to be on the train of the future, but if your timing’s wrong, you’ll be lying on the tracks in front of it.
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.