Ep.77- The Next Tech Bubble is 2-3 Years Away

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Read Time: 3 Minutes

TL;DR

  • The next tech bubble is likely to happen in 2-3 years as VC money is drying up, and unprofitable companies are forced to raise additional funding through IPOs.

  • 76% of U.S IPOs in 2017 were unprofitable, and most don’t have a plan to become profitable ever.

  • Compared to the dot-com bubble, we are now more exposed through the proliferation of 401k investments, as there are 3X more participants, and 6X more asset value compared to pre-dot com bubble.

  • The simple straight answer to a tech bubble is asset protection by stocking up on cash and shifting more investable assets to bonds

THE TECH BUBBLE WILL BURST…SOON

I know I am making a bold statement. It is entirely my personal opinion.

We are currently in a tech bubble and it will burst soon. By soon, it could be as early as next year or as late as 3 years from now.

I think there’s already a large consensus that we are in a tech bubble, but we may differ on whether the bubble will pop in 2 years or 10 years. And I’d say it’s closer to 2, because of the following four symptoms are happening now, and it sort of looks like a Ponzi scheme at scale.

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  1. Companies can’t turn a profit: Scale and growth are all that startups chase after. While they may grow bigger in reputation and usage, they are losing more money while doing that. How do they keep their business afloat exactly? Venture Capital money. For most, it’s not that they can’t turn a profit before IPO, it’s that they can’t turn a profit at all. In fact, starting from 2017, 76% of all U.S IPOs were unprofitable. It’s only getting worse in 2019.

  2. VC funding is drying up: VC funding is harder and harder to get nowadays. It’s true for new startups as well as companies raising late stage funding. But wait… they are still burning cash because they are not yet profitable, so who to they turn to then? First, brokerage firms, then the general public through IPO.

  3. Brokerage firms sort of help plug the hole: Many traditional brokerage firms, such as Charles Schwab and Fidelity, accept private investments, by building them into their index or ETF funds. In other words, out of VC money, some startups may get additional funding, through the ETF or index funds, that are told to the individual investors like you and me, all before IPO. Often time, this route isn’t large enough to replace VC money, when VC funds are drying up.

  4. IPO is the final exit, but the public is wary : If a startup is losing money, and VC funding is no longer an option, index funds are not enough to plug the hole, many companies’ final choice is to rush for an IPO, even though they don’t have a way to turn a profit. At some point, people are going to look at the fundamentals, such as the P/E ratio. You can’t keep the stocks up for years to come when the multiple is negative.

THE 2 CONDITIONS THAT WILL POP THE NEXT TECH BUBBLE

In my opinion, two conditions need to be met before the next tech bubble arrives : low in cash, and a small-scale sellout in the public market.

Low in Cash: Even when Uber lost $1.8B in 2018, Uber was still okay because it had a lot of cash in the bank, specifically +$6B at the end of 2018. But no amount of money will last forever. That $6B will last maybe 3 years and that’s it. Until then, the tech bubble won’t pop, because most companies have absorbed enough cash from private equity to last a bit. But when it gets dangerously close to only 6 months of fund left, it will rock the confidence of everyone, including its employees.

Employee Sellout: The company’s employees have more knowledge than the public. If they start to sell like crazy after the 6-month lockup period, and continue to sell their RSUs immediately after every vesting period, it will send a signal to the public market, which will then start dumping tech stocks. All is good if a company has a ton of cash in the bank. However, when these companies are low in cash, and they can’t raise anymore money from the public, it will absolutely trigger a panic, and highly likely the next bubble .

WHAT CAN YOU AND I DO?

If you believe in this educated guess as much as I do, the answer is asset protection. I have two tips on protecting ourselves in an upcoming tech bubble.

  1. Don’t buy stocks of companies that can’t turn profitable, especially right after an IPO. If you do buy these stocks, you may be generating a lot of return in the short term, because you are compensated for the risk. In the end, if a company can’t make a profit, it will eventually become MoviePass or Vice Media, both of which are worthless now.

  2. Save your rainy day fund in safe places: A tech bubble in 2000 was relatively contained in terms of its impact on the average individual. I don’t think it will be the case this time, because we are all exposed through our 401k plans, even if you are not intentionally investing in these stocks. In 1996, only 30 million Americans participated in 401k with total assets of $1 trillion. Now in 2018, according to American Benefits Council, we have 3X on the amount of participants, 100 million, and 6X the asset size, at $5.7 trillion. In order park your money in a safe place, two simple and effective ways are:

    1. Cash: If you have excess cash, you can put them into a Savings account or money markets.

    2. Bond: In the case of your 401k, where you can’t move into straight cash, you can protect yourself by changing most of your investment mix into bonds. Nowadays, since you get about the same return on short term and long term bonds, you might as well put them into short term bonds, for better protection.