Saying "No" to a Hot Investment Trend

Written by Adam English
Posted July 6, 2021

Here we are, on the back end of a long Fourth of July weekend on a Tuesday morning.

It'll be good to be back, good to get things moving along.

I've got a three-hour drive from the eastern shore of Maryland back to Baltimore ahead of me though.

Right now I'm pretty jazzed about how my sandwich-in-a-bag has the good mustard on it, and that's about the extent of what I've got working for me. I'd bet we all have our hurdles to clear this morning though, small or large, and we'll build up from here as the week goes.

Besides, we went into the weekend in a pretty good spot, didn't we?

The second quarter is done and it was a good one. The markets are at new highs and the economy is hot but not out of control (... yet?).

Plus new COVID cases in the US are lower than they have been since shortly after we figured out it might be a good idea to track them.

Instead of crossing a finish line, it really feels like we're just crossing a mile marker though. Like we only just reached a point in a marathon where people hand out woefully small cups of water. Like we're still trying to figure out a good pace.

I'm thinking we can start the week by taking a look at one of the hottest investment topics we could sink our money into that straight-up gives me the heebie-jeebies.

Quite frankly, the perspective might save some people a lot of money and from a lot of hassle, and we can work up from there as we get into the week.

I'd also love to hear from you about what sets off your internal alarm. In some ways, knowing what you don't want to invest in and why is just as important as knowing what you do.

I'll set this up with a clip from a 35 year old (!) movie:

money pit screenshot

“Two weeks!”

This is the promise of some dude that already has your money. This is the essence of SPACs.

If you want to suck the joy out of the movie (and I'm about to show you how), “The Money Pit” is a story about investors that are stuck with profound information asymmetry and illiquidity. Hilarity ensues in the movie; an attempt to tie this together ensues below.

If you listen to their pay-to-play hype machines, SPACs are the toast of the town. They know just the private company to buy and why, but they can't tell you either.

From $13.6 billion in 2019, to $80 billion in 2020, to over $80 billion in the first quarter of 2021, one thing can be said — people keep buying them.

Of course these media darlings are still so small that the day-to-day churn and “signal in the noise” of the full stock market dwarfs them, but you'd never know that from the attention they get.

And they certainly should get that attention, at least for how much they pay for their marketing campaigns.

That IS a whole lot of cash from their investors though, and good luck to their investors with getting any idea of how it is being used.

SPACs might as well be designed to tell investors nothing about what they are actually investing in.

  • When will we know what company is being bought? “Two weeks!”
  • When will the acquisition of the private company be done? “Two weeks!”
  • When will we get a look at their books? “Two weeks!”
  • When does management expect to collect any return on investment? “Two weeks!”

It's as good as any answer they have to give anyone, though they should be smart enough not to give such an exact answer.

  • When will you be done with what you said you would do?

They practically have no obligation to investors. They just need to make it impossible to prove beyond reasonable doubt that they intentionally misled any of them. Otherwise, well, sometimes things just don't seem to work out no matter how much money and time is wasted.

That, right there, is what makes me avoid these things like the plague.

There is a bit of the flip-side though, not that it makes them look much better. It's more that they don't look so bad in comparison.

SPACs can be seen as a pressure release valve for the IPO scene, and it certainly needs one. The IPO market has been chock-full of red flags for years.

Hyped up and easily manipulated metrics that have nothing to do with actually, you know, making money are the norm. So are share structure shenanigans that let early private investors cash out but retain absolute control of the company. The list goes on and on and it's probably best if I stop here.

All of that information is available to us though. It may be hard to get, but no one can IPO without opening their books.

Reverse mergers, direct listings — there are other sneaky ways to sell shares if anyone wants to game the system. But nothing is quite as odious as the wink and nod, and that's all you'll ever get from SPACs.

The information asymmetry that is baked in is a deal-breaker for me. We can find plenty of profit potential elsewhere. We don't need to deal with this nonsense.

Maybe I'm missing out but, if you'll excuse one more reference, I've got to be me.

We have a lot coming down the pike on our side, and we'll keep you posted as it does.

This is going to be a crazy summer and third quarter in the markets. Stay tuned and hold onto your butts.

Take care,

adam english sig

Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

*Follow Outsider Club on Facebook and Twitter.

Heal Your Ailing Portfolio Body