Over 100 million US dollars: that’s the valuation the operator of a single food shop in the US reached on the stock market. Balance sheets and financial metrics can’t explain developments like this. All the more reason to rely on scientifically grounded investing.
A store for specialty foods in rural New Jersey in the US recently gained international media attention: in 2020, Hometown International posted revenue of just around 14,000 US dollars. The small company is listed on the stock market. And in February 2021 it reached a market capitalization of over 100 million US dollars. There’s no really good way to explain this development – at least not by looking at the balance sheet. For many commentators, the phenomenon was just one more sign that the markets are caught up in irrational exuberance and can no longer be rationally explained.
One moment a company’s share price jumps shortly after it has filed for bankruptcy – as with car rental firm Hertz. Or a stock rises in between seemingly only because its ticker symbol resembles the symbol for the cryptocurrency Ethereum, as with furniture retailer Ethan Allen Interiors (ETH). Stories like these scare some people away from the stock market, since such moves seem to foreshadow the next price crash. Others see a certain appeal in exactly that when it comes to riding the next hot trend.
Avoiding “stories”
With regard to risk, it’s definitely better to keep a cool head. That means neither simply leaving the returns you could earn on the stock market on the table, nor betting on “stories.” Investing rationally, with a scientifically grounded system and regardless of how the markets happen to be behaving: that’s the approach at quirion. We do neither stock picking nor market timing. In other words, we don’t go looking for the next “hot stock.” And we don’t try to find the cheapest moment to get in or out either. That’s how we deliberately switch off the specific risks of individual stocks, industries and countries – what are known as unsystematic risks.
Harnessing diversification and saving on costs
Capturing the market return, but with an “airbag”: at quirion, diversification is a decisive factor. We spread the capital in our global portfolios very broadly, investing in more than 60 countries and around 8,000 companies. The broader the investment, the better the protection against irrational exuberance in individual stocks. And to keep the investment as inexpensive as possible for investors, we use ETFs to do it.
By the way: in June, car rental firm Hertz plans to successfully conclude its bankruptcy proceedings, thanks to new financing arrangements with various partners. Among the things helping the company – which has a large vehicle fleet – with its valuation is that used cars are currently in particularly high demand. There’s a bottleneck in the semiconductor market, which has caused new-car production to stall. That said, no one could have foreseen all of this precisely – just as the further outlook for the company’s stock investors can’t be predicted now. Investing in a scientifically grounded way, with a balanced relationship between return and risk, is then indeed far more rational than simply trusting in a “story.”
You can find out more about how our approach pays off here.
