What goes up must come down. This phrase coined by Sir Isaac Newton may be true for the Universal Law of Gravity, but is it also a lesson we can learn in the world of finance?
VinFast, a Singapore-based multinational automotive company under the umbrella of Vingroup, has witnessed an astounding 800% surge in a short span of time, only to fall back to its original value in a few days.
- Source: Trading View
This is the sobering truth of the stock market.
What happened to VinFast?
Shares of Vietnamese electric vehicle (EV) maker VinFast Auto have soared after their initial public offering (IPO). In fact, the stock nearly quadrupled at one point and has traded as high as $93 per share.
However, the current price is now $15.75, a stark difference from its highest point. It is almost back to the starting point before the surge.
What goes up will come down
While it may seem too good to be true, such a price increase is definitely not sustainable due to a myriad of reasons.
- Low Liquidity and Limited Outstanding Shares: VinFast demonstrated an alarming lack of liquidity in their stocks, with outstanding shares constituting only 1% of the total. This scarcity in available shares can have perilous consequences, often leading to heightened volatility and erratic price fluctuations. Investors should be wary of stocks with such limited liquidity, as they can be particularly vulnerable to sharp price corrections.
- SPAC Risks: A significant factor behind VinFast’s rapid ascent was its listing as a Special Purpose Acquisition Company (SPAC). While SPACs offer a unique way for companies to go public, they also carry inherent risks. These risks include unfulfilled merger deals, misaligned investment strategies, and a lack of transparency. As VinFast’s journey demonstrates, relying solely on SPACs as an investment vehicle can expose investors to a rollercoaster ride of uncertainty and speculation.
- Discrepancies in Valuation: VinFast’s stock, at certain points, achieved a market capitalization that surpassed that of established industry giants like Goldman Sachs and Boeing. This valuation dissonance raises fundamental questions about the true worth and sustainability of such valuations. Investors should exercise caution and skepticism when confronted with such apparent valuation disparities, as they can indicate excessive exuberance rather than sound fundamentals.
Greater Fool Theory explains everything
In finance, the Greater Fool Theory suggests that a person purchases an overvalued asset with the belief that they can later resell it at a higher price.
Even when the risks are glaring, and visible to all speculators, they will choose to believe that they can exit faster than others.
In the example of VinFast, even though you are aware that the initial surge seems too good to be true, the allure of acquiring shares with the hope of selling them at a profit can lead you unwittingly into the clutches of the Greater Fool Theory.
Additional reading: Stock IPO: Why They Are Almost Always Bad Investments
How to avoid being THE FOOL
In the world of investments, there’s no shortage of opportunities and potential pitfalls. It’s a landscape where fortunes can be made and lost, often at breakneck speed. Take the recent rollercoaster ride of VinFast’s stock as a prime example. But before you jump headfirst into the fray, here are some practical tips to help safeguard your investments.
1. Stay Grounded Amid the Hype
It’s easy to get caught up in the hype surrounding a hot investment opportunity. VinFast, for instance, saw its stock skyrocket shortly after its debut. The buzz was palpable, and many were tempted to jump on the bandwagon. However, it’s essential to resist the urge to invest hastily. Sometimes, the best move is to watch and wait as events unfold naturally.
2. Trust Your Gut on Value
When it comes to evaluating investments, trust your instincts. If something doesn’t quite add up in terms of valuation or potential returns, it’s essential to take a step back and scrutinize the details. For instance, consider this: among the companies listed on the Nasdaq Stock Market with a market capitalization of over $113 billion, not one reported revenue less than approximately $13 billion last year. Now, contrast that with VinFast’s modest sales of around 24,000 cars and revenue of just $634 million. If it seems too good to be true, it often is.
3. Seek Guidance from Financial Professionals
Navigating the complex world of investments can be challenging, even for seasoned investors. That’s where qualified financial advisors come into play. Don’t hesitate to reach out to them for personalized insights and strategies that align with your unique financial goals. Their expertise can provide you with the guidance you need to make informed decisions.
4. Break Free from the Greater Fool Mindset
The Greater Fool Theory is a belief that someone else will buy an investment from you at a higher price, even if it’s overvalued. It’s a mindset that can lead to risky decisions. Instead, prioritize sound investment strategies based on careful analysis and long-term goals. Remember that a successful investment journey is built on a foundation of prudence and patience.
Protecting your investments requires a combination of vigilance, intuition, professional advice, and a commitment to sound investment principles. By following these tips, you’ll be better equipped to make informed decisions and safeguard your financial future.
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