When the Reddit IPO hit the market last month, the stock surged almost 50 per cent on its first day, turning heads and sparking discussions everywhere. In the past, social network Reddit made the news for fuelling the meme stock phenomenon. Thanks to commentators’ “support” on Reddit forums, investors had previously piled in to unloved stocks such as Gamestop or AMC, which were then pushed to record highs. Many who followed this advice got burned. A good parallel is the lesson that a Swedish king learned a few hundred years ago.
Today, the wreck of a ship called the Vasa is housed in a museum in the heart of Stockholm – a reminder about ambition overtaking execution. In 1626, King Gustav II Adolf, driven by a vision of naval dominance, commissioned the construction of a warship that would be the envy of the Baltic Sea. The Vasa was not just any ship; it was to be the pinnacle of maritime engineering, armed with 36 bronze cannons and a testament to Sweden’s military might and technological prowess.
As the ship neared completion, the king’s ambition swelled, and he ordered the addition of a second cannon deck, increasing the armament to 64 guns. This last-minute change drastically altered the ship’s balance and stability, making it dangerously top-heavy.
On a fateful day in August, 1628, the Vasa set sail on its maiden voyage from Stockholm as the city’s inhabitants lined the harbour, eager to witness their nation’s triumph. Yet, their pride turned to horror as the Vasa sank mere minutes after embarking. The ship’s excessive armament, meant to be its greatest strength, became its fatal flaw, sending it to the depths of the Stockholm harbour.
We can see this historical episode as a parallel for the pitfalls of modern investing, where the allure of chasing returns, following fads, or investing in meme stocks can lead to a portfolio’s downfall. The Vasa’s story is a vivid reminder that ambition, unchecked by prudence and without a strong foundation or strategy, can lead to disaster.
Key research sheds light on how overtrading, spurred by overconfidence, can significantly erode investment returns – by almost 7 per cent a year. Investors, seduced by the prospect of high returns, often engage in excessive trading, not unlike King Gustav’s relentless pursuit of greater firepower that compromised the Vasa’s stability.
Research also found that high media pessimism predicted downward pressure on share prices followed by a slow return to fundamentals. Just as the Vasa’s design was hastily altered, investors who make spur-of-the-moment decisions based on the latest purported news or trends can destabilize their portfolios.
Academic and industry evidence is clear: chasing returns, succumbing to investment fads, or getting swept up in the frenzy of meme stocks can be perilous. These strategies often lead to a portfolio that is top-heavy and unstable, much like the Vasa was.
The Vasa’s story is eerily relevant to investors today, especially in light of recent market phenomena like the Reddit IPO. It serves as a vivid reminder that in seeking financial rewards, balance and stability are key. The appeal of quick profits, especially from trending stocks or speculative ventures, can lead to portfolio decisions that mirror the bad decisions which proved fatal for the Vasa.
Investors can draw several key lessons from the Vasa’s demise.
Diversification: Just as the Vasa was overloaded with cannons, investors should avoid overloading their portfolios with one kind of asset. Too great a concentration in one area will throw the portfolio off balance. Diversification spreads risk and can prevent a portfolio from sinking under the weight of a single failed investment.
The value of caution: The king changed the building plans for the ship at the last minute despite all the work done to design a seaworthy craft. Investors should take note and resist making last-minute changes from well-thought out plans, especially during times of exceptional market exuberance, and particularly when it comes to more high-risk, speculative assets.
Foundation before innovation: The Vasa was a technological marvel, yet its innovative design was its downfall because of a lack of foundational stability. Innovations in investing, such as new financial products or emerging sectors, should be approached with a solid understanding of their foundation and risks.
Learning from mistakes: The Vasa’s sinking was a harsh lesson for Sweden, but one that informed future shipbuilding. Investors, too, should learn from their mistakes and the missteps of others, using these lessons to build more resilient strategies.
With the IPO of Reddit, there may be even more stories or “news” that tempt investors to overreach. In investing, as in naval engineering, ambition must be tempered with caution, lest our aspirations sink under the weight of their own designs.