Issue #91, Volume #2
The Red Flags To Help You Avoid Risky Trends
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| Investment fads don’t end well… The red flags to know… Cathie Wood’s Ark Innovations… Cannabis stocks… Electric vehicles… Too good to be true likely is… Trump’s tariffs tax… |
Editor’s note: With Porter on vacation this week, we are presenting an issue of The Big Secret On Wall Street that is as relevant today as it was when we published it in January 2024… It involves fad investing… And we share it with you as a way to point out what we at Porter & Co. do not do – we don’t chase crazes, pumped-up stocks, or trends of the day.
Instead, our flagship advisory The Big Secret On Wall Street focuses on capital efficient stocks and world-class businesses that you can buy and hold forever, since we seek out companies that prioritize returning significant cash to shareholders over the long term.
Even Sir Isaac Newton got sucked into an investment fad.
In late 1719, Newton accumulated a position in The South Sea Company valued at £13,000, equivalent to $2.5 million in today’s money. The South Sea Company was a British joint-stock company (an early version of an LLC) founded in 1711 by an Act of Parliament. After a few years of lackluster performance, King George took over as the company’s governor, which sent the shares soaring.
After buying in under £200 per share, Sir Isaac began selling the stock at £400 per share.
Demand kept rising from February 1720 to April 1720, and South Sea share prices roughly doubled.
Newton bought back in… at almost double the price he received as a seller months prior. Weeks after his new purchase, the stock price collapsed from over £950 to under £200.
By December 1720, Newton lost today’s equivalent of millions. He’d discovered gravity decades earlier when an apple fell in his garden – but now, he’d learned painfully that the same principles held true in the stock market.
Despite his education and preternatural understanding of risk and numbers, Newton fell for a classic economic bubble – just like countless other speculators over the centuries. And investors will keep making those errors today… unless we understand how fads work and how to avoid them.
An investment fad is a short-term financial trend that quickly gains popularity and interest among investors – but typically lacks long-term viability or strong underlying fundamentals.
You don’t need a deep understanding of finance – or physics, or astronomy – to spot fads. You simply need a strong mix of skepticism, market awareness – and knowledge of a few bright-red flags:
- Red Flag #1: CNBC or other media outlets push the new trend. Media-sponsored events and “investment conferences” typically encourage investors to invest large sums immediately, pushing a combination of FOMO (fear of missing out) and promises of high, fast returns.
- Red Flag #2: The returns don’t align with historically average market returns. Fads typically lack fundamentals, strong business models, revenue streams, and developed markets. Instead, they rely more on hype than substance.
- Red Flag #3: The “peanut gallery” is buzzing. Watch to see if people with a shallow knowledge of investing get excited about an opportunity. If your cousin – who can’t balance a checkbook – starts trading Dogecoin on his cell phone, that’s a bad sign.
- Red Flag #4: The business operators make bad decisions. In addition to the investment, you must look at the people who are operating the companies… and see if they have a weak track record or a history of failed ventures in various businesses. A person who was working in cannabis in 2019, angel investing in 2020, jumped to blockchain in 2021, and then ran a non-fungible-token (“NFT”) company in 2022 probably isn’t your ideal CEO.
- Red Flag #5: The regulators are cautious. If you can’t spot fads independently, regulatory agencies like the Securities And Exchange Commission (“SEC”) or Commodity Futures Trading Commission occasionally issue alerts about potential investment scams or fads.
As a masterclass in fads, consider always-super-bullish investment manager Cathie Wood, who has notoriously invested in unprofitable companies with terrible fundamentals. They usually do great… for a while… until they collapse. Wood’s Ark Innovation Fund (ARKK) portfolio consists of tech wunderkinds like Coinbase (COIN), Roku (ROKU), and Twist Bioscience (TWST).
Wood argues that investors need to “wait five years” for Ark’s investment to pay off – yet continue to burn through money in overhyped industries that still lack developed markets and companies that have competitive advantages in those spaces.
Let’s look at several prominent fads of the last decade and see how they fit into our framework… and where they are now.
Digital Junk
In what could be the largest bubble in the last 50 years, junk cryptocurrencies (non-Bitcoin or Ethereum) and NFTs reigned over other recent fads like Cathie Wood’s fund.
NFTs are digital assets that are verified using blockchain technology. The developers say they ensure the authenticity of digital artwork or collectibles.
Three to four years ago, it was impossible to escape the hype of the cryptocurrency and NFT market – including the media’s godlike praise for fraud extraordinaire Sam Bankman-Fried of FTX, now serving time in the clink.
The NFT craze peaked when digital marketplace Opensea surpassed $10 billion in all-time trading volume in November 2021. Media speculation fueled expectations of massive growth in the NFT space, especially with large tech firms like Meta Platforms (META) angling toward the Metaverse (another fad that hasn’t reached its potential).
The craze suggested widespread disruption of mortgage contracts, concert tickets, and other forms of contract law. There was even speculation on individual NFTs, including the purchase of the first Tweet ever (Twitter founder Jack Dorsey’s) for $2.9 million.
Today, most NFTs are worth a fraction (at best) of their speculative values just four years ago. A few years later, the Dorsey NFT received a bid of just $4.
The best equity representation of this fad was the collapse of the Defiance Digital Revolution ETF (NFTZ). The exchange-traded fund (“ETF”) tracked the performance of various companies expected to benefit from adopting blockchain, NFTs, and, ultimately, the Metaverse.
Following its inception in late 2021 (the height of this bubble), the ETF cratered by more than 70% before shutting down in February 2023. From Dogecoin to cryptocurrencies designed to pay for dental work, the space has experienced a dramatic decline in recent years. And all the money remaining has spilled into the last two major projects standing: Bitcoin and Ethereum.
We anticipate that Bitcoin will continue to do well as investors push into “digital gold” and institutions move into the space via spot ETFs. Bitcoin is the one consistent cryptocurrency that isn’t built around fad projects.
The Cannabis High Is Over
Cannabis has been another speculative fad in the last five years.
The media helped fuel this craze by over-sensationalizing minor policy shifts, while pundits encouraged investors to pour billions into the sector.
Investors speculated on catalysts like widespread legalization of medicinal and recreational cannabis at the state level. Toronto-based cannabis company Canopy Growth (WEED.TO) hit a market cap above $40 billion, while stocks like Scotts Miracle-Gro (SMG) – a fertilizer company – surged from $100 per share to nearly $250 in two years.
But years later, marijuana remains a Schedule I drug, companies still can’t bring cannabis across state lines, and questions exist about the banking sector’s future role in providing services to cannabis operators. Scotts Miracle-Gro is trading today at $60 per share, while the investors lost billions on Canopy Growth from its top in February 2021 (at C$547 per share) to the C$1.44 price it traded on August 7.
And the AdvisorShares Pure U.S. Cannabis ETF (MSOS) has declined 93% from its all-time high in February 2021.
More Bad Apples Fall
The past few years have been a bumper crop for fads, as the Federal Reserve’s massive quantitative easing and trillions in Congressional stimulus gave speculators all the fiscal grease required to keep the markets running at outlandish valuations.
The electric-vehicle (“EV”) mania has fizzled, with stocks like ChargePoint (CHPT) and Rivian Automotive (RIVN) off 96% and 89% from their 2020 and 2021 respective highs. Despite all the government mandates that President Joe Biden offered (and that President Donald Trump has since mostly eliminated), consumers still don’t want EVs, and the sector is crashing.
Work-from-home stocks like DocuSign (DOCU) and Zoom Video Communications (ZM) have also collapsed 78% and 86%, respectively, from their speculative highs after the COVID-19 bubble. The short-term thinking argued that companies would allow their workers to stay home in their sweatpants and be unproductive. But companies have sobered up, and put frameworks in place to get workers back to the office – or, in Porter & Co.’s case, the barn.
Finally, the wave of special purpose acquisitions corporations (“SPAC”) has fueled dramatic losses, bankruptcies, and busts in recent years. In 2020, the SPAC craze started with private companies merging with shell companies to bring those companies public. This included names like sports-gambling business DraftKings (DKNG) and EV maker Lucid Group (LCID). These companies were largely venture-capital-level investments with sky-high valuations in developing industries. Speculators went crazy bidding up these stocks. DraftKings surged more than 600%, before crashing back to Earth a year later. It’s made a slight resurgence but is still 40% off its 2021 high.
In 2023 alone, 21 SPACs went bankrupt, according to Bloomberg. All told, those bankruptcies wiped out $46 billion in shareholder equity from their peak market capitalizations.
These aren’t the last fads or bubbles of our lifetime.
Avoid Fads, Focus On The Long Term
The adage goes that if it’s too good to be true, it likely is.
While the hype of these “disruptive” sectors and speculative investments creates profits for some early investors, the downside risk is much larger than the short-term outcomes.
Here at Porter & Co., we refuse to chase fads. We focus on great companies with low debt, tangible assets, and strong capital efficiency – ones that return the maximum amount of cash possible to shareholders over a long period of years.
To celebrate Porter & Co.’s third anniversary, Porter is doing something he has never done before… something that probably nobody has done before.
He has set aside $1 million to sponsor memberships to The Big Secret On Wall Street – Porter & Co.’s flagship advisory.
If you buy one year of The Big Secret now, Porter will sponsor your subscription for life… But you need to qualify. And to qualify, you need to meet three specific conditions.
Find out here if you do, in fact, qualify.
The Dark Consequences Of Trump’s New Investment
President Trump’s administration plans to funnel billions of dollars into one specific AI company. On the surface, this investment looks like the next step in Trump’s goal to make the U.S. the AI capital of the world. But dig a little deeper, and the consequences of this investment could be much, much greater than that. This company has the power to send the current AI king on a swift and ruthless 50% crash starting as soon as August 1 – bankrupting Americans who don’t see it coming. But those who do could stand to realize historic gains over the next 12 months.
Click here for the full story.
Three Things To Know Before We Go…
1. Consumer spending posts sharp decline. The personal consumer expenditures (“PCE”) component of U.S. GDP fell 0.15% in the first two quarters of 2025, after adjusting for inflation. This marks the biggest drop since the COVID-19 pandemic, and mirrors similar weakness in consumer-facing companies in the latest Q2 earnings results. With nearly 70% of the U.S. GDP fueled by consumer spending, this signals challenges ahead for the overall economy.
2. The Trump tax… hikes? President Donald Trump promised tax cuts for Americans, and his “One Big Beautiful Bill” Act largely delivered on that promise by extending and expanding on his 2017 tax cuts. However, according to analysis from JPMorgan, the president’s tariffs may more than offset those cuts. In fact, as the chart below highlights, if current tariffs remain in effect, they would represent the third-largest effective tax increase since at least the 1940s.
3. Crypto is coming to your 401(k). On Thursday, President Donald Trump signed an executive order that clears the path for alternative assets – including Bitcoin and other crypto assets, private equity, and real estate – to be included in employee retirement plans. Specifically, the order directs the U.S. Secretary of Labor to review “fiduciary guidance” on alternative assets in 401(k) and other defined contribution plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), which sets minimum standards for retirement plans.
Tell us what you think: [email protected]
Good investing,
Porter Stansberry
Stevenson, Maryland