Knowing When to Say 'When'

In the winter of 1928, Joe Kennedy decided to stop to have his shoes shined before he started his day's work at the office. When the boy finished, he offered Kennedy a stock tip: "Buy Hindenburg." Kennedy soon sold off his stocks, thinking, "You know it's time to sell when the shoeshine boys start giving you stock tips. This bull market is over."

Over the years we've all seen events that indicate the high in the stock markets - blockbuster deals by private equity that have absolutely no chance of ever making a return (at least positive) for their investors [1] , commercials that imply a tow truck driver owns an island/country [2] or the wave of "bubble funds" that seem to crop up every time during a market peak [3] .

I bring these up because I recently saw a commercial [4] that certainly meets the criterion of hinting at a market high. In this case the hands down winner is the recent Super Bowl commercial for a company called SoFi. Its commercial model believes the yawning gap between have and have-nots is filled with those who are "great" and those who are "not great." Frankly you are far more likely to be with the "not great" than the "great," according to their marketing.

So what does SoFi do? At its most basic it has taken the unicorn model (pumping an organization full of venture capital and private equity and delaying a public offering) writ large - providing loans for people who don't need money (the great) and not providing loans for those who have a need (the not great).

One of my favorite writers Felix Salmon has a great discussion about the commercial here . He cogently lays out the absurdity of the company's message, its ridiculous valuation and the improbability of spending a large percentage of its revenue on insulting marketing campaigns.

My take on SoFi is from a different angle. Much like Ambassador Kennedy's feelings on getting a stock tip from the shoeshine boy, SoFi's commercial is a warning signal for a potential market top. Combined with other news such as this and this , I recommend keeping your eye out for three clear markers of a market peak.

  1. Absurd/extreme financial product claims: Running a commercial that insults the vast majority of Americans is unlikely to provide a company with a lot of positive P.R. More importantly, claiming that nearly everyone you meet on the street is "not great" is one of those absurd claims that seem to pop up when markets get frothy. Much like the tow truck driver owning an island, this is a commercial absurd in its claims and not worthy of investors' time.
  2. Poor capital allocation: In general, the markets should be the means of allocating capital where it can best achieve adequate returns for investors. The operative words here are "in general." During periods such as 1999-2000 or 2006-2007 the markets can dramatically fail in this core function. Sometimes capital can follow

Warning! GuruFocus has detected 6 Warning Signs with HLF. Click here to check it out.

HLF 15-Year Financial Data

The intrinsic value of HLF

Peter Lynch Chart of HLF

Warning! GuruFocus has detected 3 Warning Signs with VRX. Click here to check it out.

VRX 15-Year Financial Data

The intrinsic value of VRX

Peter Lynch Chart of VRX

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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