On Monday night, I wrote an article which revealed my worries about the increasing likelihood of another stock market crash. Indeed, I think some markets – notably US tech stocks – are in one of the biggest bubbles ever blown. Here are three more red flags that make me anxious and how I’m making the best of a scary situation.
1. Tesla: Musk buy?
I first rode in a Tesla earlier this year – it was a wonderful ride and a glimpse into the future. However, I feel there’s no way on earth that Tesla is worth the $349bn it’s currently valued at. Sure, it makes great electric vehicles, but they don’t sell in the tens of millions. Yes, Elon Musk is a tech visionary, but his company loses money on every sale and only profits from selling regulatory credits.
Today, Tesla is more valuable than the world’s five biggest car manufacturers combined. This is what happens just before a stock market crash.
2. Return of the SPAC (before the stock market crash)
A SPAC is a Special Purpose Acquisition Company, sometimes known as a ‘blank cheque’ company or ‘cash shell’. It has no operations, but goes public with the goal of acquiring or merging with a company bought with its flotation proceeds. SPACs have had a very troubled history. They tend to appear during market bubbles and then implode after crashes.
A recent example of a SPAC deal would be transport-tech firm Nikola, which listed on the Nasdaq in June. Following worrying allegations this month, Nikola shares have crashed by 63%. Another warning of a coming stock market crash.
3. Snowflake’s on Wall Street
That’s not a typo! What it means is that Snowflake is on Wall Street, in that cloud-based data-warehousing provider Snowflake has listed its shares on the NYSE. On 16 September, its flotation raised $3.4bn for the Warren Buffett-backed company by selling 28m shares at $120 each. The share price soared to $315, before easing below $254 after day one. As I write, Snowflake shares hover around $223, valuing it at $61.8bn.
Thus, this heavily loss-making business founded just eight years ago is priced around 65x 2020 sales. I think that’s crazy – and my third stock market crash indicator.
My cure for stock market crashes
One thing veteran investors know is that every bubble ends with a stock market crash. After 33 years as an investor, I know it’s impossible to predict exactly when a crash will arrive. The warnings signs can even often appear a year or two before the inevitable collapse.
Something old hands also know is it’s almost impossible to get ‘market timing’ right. In other words, it’s hard to time your exit and entry points. Thus, selling up and walking away just isn’t an option for almost all investors.
Therefore, my current strategy is to look for ‘SLR’ shares, as I’ve written before. These are low-risk, value-orientated shares that offer the safety-first combination of (in order of importance): Safety, Liquidity and Returns.
To sum up, I would much prefer to invest in well-run FTSE 100 businesses with strong balance sheets, rather than high-priced US tech stocks. Also, I’d recommended promptly filling your Stocks and Shares ISA with cash. You can then keep some of your powder dry to await the bargain buys that emerge during the next stock market crash!