The Global Guru: Three ‘Can’t Lose’ Investment Bubbles that Just Popped

One of my favorite quotations is from the German philosopher Arthur Schopenhauer, who said:

All truth goes through three stages.

First, it is ridiculed.

Second, it is violently opposed.

Finally, it is accepted as obvious.

Although Schopenhauer wasn’t thinking about investing per se, you can still say the same about “can’t lose” investment themes of the day.

Advocates of the hot investment themes have an almost religious zeal and commitment to their cause. Dare to disagree with them and you’ll be “ridiculed” as someone who “doesn’t get it.”

The story always unfolds the same way.

Just go back to the arguments supporting the dotcom boom in 1999.

“The Internet is everywhere. It will dominate our lives as far as the eye can see. It has also minted dozens of 20-something billionaires in a matter of months. How can you not invest in it?”

Then the investment theme slowly starts to unravel. It turns out that making money from a website isn’t as easy as selling dog food over the Internet.

One day, everyone rushes for the exit doors at once.

Overnight, it becomes “obvious” the whole dotcom boom was yet another bubble.

Ironically, the zealots were right in many ways.

The Internet did come to dominate our lives. And it upended the business models of music, videos, television, banking and even your local shopping mall.

But unless you were invested in a handful of winners, Internet companies were a lousy place to make money for most of us.

Just as Schopenhauer predicted, by 2001, that was becoming “obvious.”

Three Recent Bubbles That Went Pop

Investment bubbles are present, everywhere, all the time.

And, yes, there are bubbles even in the midst of the greatest financial crisis since the Great Depression.

Here are three bubbles that went pop over the past year; the past month; and the past week, in that order.

I. China

Over the past 30 years, China has gone from an economy the size of the Netherlands (population: 17 million) to the second-biggest economy in the world. Even Warren Buffett made a mint on the China Miracle by turning $500 million invested in PetroChina into $3.5 billion when he sold it.

Yet after dominating magazine covers since 2005, China’s star has fallen over the past 12 months. Signs indicate a credit bubble, coupled with slowing growth. China skeptics, once “ridiculed” by China bulls, now are seen as recognizing the “obvious.”

The hard truth is China never really made much money for investors. Over the past 20 years, an investment in an S&P 500 exchange-traded fund (ETF) trounced China by more than 2 to 1.

Schooled in Austrian economics and how state-owned firms operating in centrally planned economies are mismanaged, I’ve always been skeptical about investing in China.

Yet that hasn’t kept me from losing money by investing there. This includes a lovely little scam in the form of China MediaExpress Holdings, Inc. (CCME), which, along with many other Chinese small caps, was delisted in the United States after an accounting fraud.

Even Buffett’s own investment in China’s electric car manufacturer BYD Company Ltd. (BYDDF) is down over 70% from its peak.

II. Apple (AAPL)

Six months ago, Apple was still all the rage on Wall Street. Apple was not only the most valuable company on earth, but also set to be the first trillion-dollar company in history. That has all changed as Apple’s stock has declined 22% in the past three months, and tumbled nearly 50% since its peak of $705.

Apple’s highly anticipated second quarter fiscal 2013 earnings will be released today. However the numbers come out, here are two non-financial reasons Apple has lost the plot.

First, Apple has plans to construct a massive new $5-billion, Norman Foster-designed, space ship-style headquarters. Sitting on a $137-billion pile of cash, this expense won’t bother Apple much. But shiny new corporate headquarters are a lot like a shoe shine boy giving you a stock tip — always a good sign that the company’s stock price has reached a top.

Second, as an Apple user myself, I think Apple has stumbled. And I have (reluctantly) voted with my wallet. After holding out for a new, yet-again delayed iPhone 6, I’ve just swapped to an HTC One — a brand I barely heard of two months ago.

Why? It looks like what an iPhone should look like — a slimmed-down version of my still very cool-looking Macbook Air.

III. Gold

No recent investment theme has collapsed more swiftly, violently and perhaps as unexpectedly as last week’s collapse of gold.

Gold had already had a lousy six months.

But if you assume a normal distribution of stock prices — which only finance textbooks do — last Monday’s collapse in gold prices should have only happened once every 2,000 years.

If you’re long on gold, last week’s drop, however rare, was painful.

The hedge fund world’s “one-hit wonder,” John Paulson, has much of his remaining hedge fund’s net asset value denominated in gold. Reports said he had as much as $1.0 billion wiped off of his net worth in just two days.

Yet, both Paulson and the gold bugs are sticking to their guns. And the passion of “China Bulls” and Apple “fan boys” pales in comparison to the wrath of “gold bugs” aimed at those who dare to argue against gold as the only “one-decision investment” in history.

Gold bugs continue to stick to predictions that gold’s per-ounce price will reach $2,000, $5,000, $10,000 or even $20,000.

But here’s another sign of another top in gold I’ve just uncovered…

April 29 will see the release of a new book by Nick Barisheff titled “$10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven.”

This may join the publication of “Dow 36,000” as the iconic contrarian indicator of an investment theme that has run out of steam.

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Chances are, you’ll probably “ridicule” at least one of the arguments I’ve set out above.

If you are European, or a big Jim Rogers fan, your belief that the “China miracle” will doom a crumbling U.S. empire has little to do with the losses you’ve endured in your Chinese investments.

If you are an Apple fan boy, the idea that Apple might one day go the way of a once equally dominant Nokia (NOK) strikes you as patently absurd.

If you are a gold bug, you’ll dish out statistics about how a single ounce of gold was always priced to buy you the best suit, even back in Roman times. (I’m not sure how you’d argue for a $10,000 suit, though!)

Obviously, I disagree. This time is NOT different.

And as Schopenhauer would have predicted, that will become “obvious” over the coming months and years.

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