January 23, 2025 – The Intelligent Investor by Ben Graham, first published in 1949, is widely regarded as one of the greatest investment books of all time. It is a foundational text for rational and fundamental value-based investing, offering timeless advice on how to think about capital allocation and risk management in the capital markets.
Graham emphasized that intelligent investing should based on thorough analysis, offering safety of principal with an adequate return. Speculation, by contrast, is driven by market hype and price movements without regard for fundamentals.
One of Graham’s most famous declarations from the Intelligent Investor posits, “In the short run, the stock market is a voting machine. But in the long run, it is a weighing machine”, encapsulating his philosophy that short-term market movements are driven by sentiment and popularity (like a voting machine), while long-term performance reflects the intrinsic value of businesses (like a weighing machine). When the market acts as a weighing machine, asset prices converge to their fundamental values.
Warren Buffett has praised the book, claiming it provided a great foundation of knowledge on how to approach investing. “I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.”
Fast forward 75 years, and the difference in popular investing approaches, particularly with newer investors, could not be more stark.
Starting in 2021, with the tremendous rally and retail investor attention paid to underperforming and heavily shorted securities of GameStop, AMC Entertainment, and Bed Bath & Beyond, the meme stock craze was born.
New investors seemingly no longer consulted Graham’s magnum opus, but looked to Reddit, Tiktok, and YouTube instead to direct their investment activities.
As the meme stock craze grew, rational and fundamental analysis was disregarded. Instead of focusing on business fundamentals and security analysis for investment selection, the YOLO retail investor was primarily concerned with viral trends and hype, manifested through a stock’s popularity and trading volume discussed on social media and online chat boards.
Since then, AMC stock has shriveled and Bed Bath & Beyond has gone bankrupt. Conversely, GameStop’s meme stock surge has mostly sustained. Over the past 5 years, GameStop shares are up nearly 2,500%, however, down significantly from its frenzied peak in 2021.
Nevertheless, as interest in meme stocks has lost a bit of steam, a new, shinier (and far more speculative) object has taken its place: memecoins.
Memecoins are cryptocurrencies created as jokes or internet memes, gaining popularity due to viral social media trends, humour, or celebrity endorsements rather than any inherent utility or technological innovation. Unlike cryptocurrencies like Bitcoin or Ethereum, which are designed as digital currencies or platforms for decentralized applications, memecoins have no inherent use case or fundamental value. They are pureplay tools of speculation exclusively relying on the greater fool theory, which suggests the price of an asset can continue to rise as long as someone (“a greater fool”) is willing to buy it at a higher price, regardless of the asset’s intrinsic value.
Dogecoin, the first memecoin, was launched in 2013 as a parody of the growing cryptocurrency space. The Shiba Inu dog-themed cryptocurrency was built on a fork of Litecoin, which was itself a fork of Bitcoin.
Ironically, although it started as a joke, more than 10 years later, Dogecoin remains as popular as ever. Despite the lack of use cases and development, along with founders that have disavowed the memecoin, remarkably, Dogecoin actively trades at a market capitalization above $50 billion (roughly equal to the value of four GameStops).
Source: CoinMarketCap
$50 billion of market capitalization is not inconsequential.
One can create a memecoin in a matter of minutes with minimal cost. Due to the proliferation of token creation platforms, more than three million memecoins were launched last year, with tens of thousands launched on a daily basis. At this rate, you would figure they would have run out of memes by now.
More than 99% of the memecoins launched have died and wiped out speculators within their first week of trading. Nevertheless, the memecoin market continues to be worth more than $100 billion in aggregate.
The memecoin market is still experiencing its 15 minutes of fame. It should be to no one’s surprise that none other than Donald Trump, three days before his inauguration as President of the United States no less, launched his official memecoin. As expected, the “offering” was popular among speculators, and the TRUMP memecoin ballooned to a $40 billion market capitalization within 48 hours of its creation. Note that Trump’s wallet controls 80% of the supply, currently “worth” more than $30 billion to the real estate developer and reality show celebrity.
Seemingly discovering a free-money machine, the Trump family tapped the market again just two days later, launching the MELANIA memecoin. Currently, MELANIA has a fully-diluted market capitalization of nearly $4 billion, with her wallet controlling nearly 90% of the supply. Ironically, these Trump family memecoins, which are arguably illegal unregistered securities offerings, were issued just days before Gary Gensler, the anti-crypto previous Chair of the SEC, resigned.
It can take a business multiple generations to build up to a multi-billion valuation. These days, a celebrity or influencer can launch a memecoin and be worth billions in mere hours. These memecoins will continue to be launched until there are no more fools willing to part with their money, which will occur when these coins stop appreciating in price.
Given this dynamic, it is no wonder that the crypto market has attracted so many speculators (known as “Degens”, short for degenerates). If one can make a 10x return in less than a day in memecoins, then why even bother with stocks?
This chaos represents the current market environment that we find ourselves in – a “meme market” symbolized by a speculative frenzy in worthless tokens of infinite supply.
While Ben Graham gave the analogy of a gambling-influenced market run by voting machines, it seems like it has been a long time since the capital markets have been influenced by rational weighing machines. Perhaps the thought-to-be-timeless lessons of the Intelligent Investor, such as investing based on fundamentals such as quality and value, no longer apply.
Source: X
Nevertheless, historically, speculative fervours have proven ephemeral. What we do not know is how or when it will end. It is often said that being early is the same as being wrong. In any event, we believe it is prudent to hedge one’s downside exposure, if and when the speculative animal spirits retreat, bringing down the most risky assets with them.
To facilitate hedged equity portfolio ideation, we highlight one top-decile stock expected to outperform and one bottom-decile stock expected to underperform in this month’s AlphaRank Top Stocks.
OUTPERFORM: Trican Well Service Ltd (TSX: TCW) is a Canadian oilfield services company that provides specialized products, equipment, services, and technology for drilling, completion, stimulation, and reworking of oil and gas wells. TCW is trading at an attractive valuation of 4.8x EBITDA and has an industry-leading return on capital of 44%. It has a high free-cash-flow yield, utilizing its cash to repurchase nearly one-tenth of its shares outstanding over the past year. Trican has been beating market expectations, and its stock continues to perform with positive momentum. With an AlphaRank of 99.9/100, we expect the stock to outperform. Disclosure: Long TCW in the Accelerate Canadian Long Short Equity Fund (TSX: ATSX) and the Accelerate Absolute Return Fund (TSX:HDGE, HDGE.U).
UNDERPERFORM: Bitfarms Ltd (NASDAQ: BITF) operates vertically integrated bitcoin mining operations. Bitcoin mining is capital intensive with significant operating leverage. Bitfarms has consistently generated net losses and relied on continuous shareholder dilution to fund its operations. As a result, its shares outstanding have grown at a 40.9% CAGR. In addition, its share price momentum has been negative, despite the raging bull market in bitcoin. If speculative animal spirits decline, the price of bitcoin may take a dive, with bitcoin miners such as BITF taking the brunt of the damage. With an AlphaRank of 2.7/100, we expect the stock to underperform.
The AlphaRank Top and Bottom stock portfolios exhibited mixed performance last month:
- In Canada, the top-ranked AlphaRank portfolio of stocks fell by -2.2% compared to the benchmark’s -3.4% drop, while the bottom-ranked portfolio of Canadian plunged by -7.6%. The long-short portfolio (top minus bottom ranked stocks) gained 5.4% in a positive month for short selling. Over the past five years, the top decile AlphaRank portfolio has risen nearly 150%, while the bottom-ranked portfolio is approximately flat.
- In the U.S., the top-decile-ranked equities fell by -5.9%, underperforming the S&P 500’s -2.4% drop. Meanwhile, the bottom-ranked stocks declined by -4.1%, leading to a -1.8% return for the top decile minus the bottom decile long-short portfolio. Over the past five years, the top-ranked U.S. equities have gained approximately 125%, while the bottom-ranked portfolio has fallen by more than -30%.
AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security from zero (bottom-ranked) to 100 (top-ranked) based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and with a market capitalization exceeding $100 million are evaluated. In both the Accelerate Absolute Return Fund (TSX: HDGE) and the Accelerate Canadian Long Short Equity Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.