01.11.2022

Subscribe to Macro Man Columns
It’s Time for Money-Losers to Start Losing Money: Macro Man
By Cameron Crise
(Bloomberg) — When aspiring traders ask me for advice about how to improve their skills, one of my favorite prescriptions is to keep a trading diary. Maintaining a log of one’s thoughts and real-time perceptions is a useful discipline, and my most successful period as a portfolio manager came at the time when I wrote the online precursor to this column. 
These days, I still enjoy going back and reading old pieces, savoring a pleasing turn of phrase, enjoying a piece of well-argued analysis and occasionally laughing ruefully at my mistakes. One ill-timed piece from a couple of years ago has been in my thoughts recently, as its time may finally have come again. It could, and indeed should, be the case that policy normalization should reassert investors’ preference for companies that actually make money.
In November of 2019 I published a piece revealing the breathtaking “insight” that the stocks of profitable companies tend to outperform those that lose money. In the battle between the novelists and the nerds — that is, between the narrative and the numbers — it’s usually the bean-counters who win. Ironically, that piece coincided pretty neatly — almost to the week, in fact — with the start of the rise of money-losing stocks over their profitable brethren. While this turn predated the spread of Covid, of course, it’s pretty clear that the pandemic and the associated policy response had an important role in fanning the animal spirits of narrative-driven investors.
 
Sometimes you just have to laugh when your timing is that bad (at least in retrospect.) What has struck me, though, is that the outperformance of narrative-driven stocks really resembles what we saw at the peak of the dot-com bubble. That’s hardly the first comparison to be made between the post-pandemic stock market frenzy and the height of the first Internet craze, of course, but it’s nice to put some numbers on it. Of course, everyone knows that after the peak of the dot-com bubble, the stock market scuffled for a couple of years thereafter, right?
 
Well, yes and no. In aggregate, profitable companies actually rallied in 2000 and 2001, though they did drop somewhat in 2002. But the real nexus of market weakness was in those stocks that were unprofitable — the very same ones that represented the apotheosis of animal spirits and, dare we say, investor stupidity.
And so as we confront the end of the Federal Reserve money drop and the commencement of policy tightening, it is interesting to observe how history may be rhyming. After outperforming dramatically between late 2019 and the middle of last year, those narrative stocks started to sputter, and have recently executed something of a swan dive as tightening talk heats up.
 
But here’s the thing: Those narrative-driven money-losers still have outperformed profitable companies since my ill-timed column of November 2019. While those who still believe the hype might argue that this somehow “proves” the accuracy of the narrative stock thesis, others might reasonably conclude that this implies that significant air still needs to come out of the bubble in money-losers. Indeed, the dot-com precedent would suggest that it could be a long and bumpy road ahead for those who cling on to a stale viewpoint of the investment backdrop.
 
Indeed, the anomaly is not in the magnitude of the drop in money-losers — which has been modest — but in the vehemence of the rally that preceded it. Perhaps lightning will strike twice, and this column will prove to be a godsend to those heavily invested in narrative-driven meme and innovation names. The more likely outcome, however, is that mean reversion continues to rear its ugly head, and that money-losers live up to their name. 
The good news, however, is that money-making companies have traditionally offered a smoother glide path to, err, making money.
NOTE: Cameron Crise is a macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice. For more markets commentary, see