This article was first published in the Globe and Mail on December 21, 2024. It is being republished with permission.

by Tom Bradley

Vancouver City Council voted recently to explore accepting payments through bitcoin. Earlier in the fall, Premier Doug Ford of Ontario dreamt (out loud) of building a tunnel under Highway 401. And the Leafs started the season with the second-best odds of winning the Stanley Cup.

These items sum up where we are on the fantasy-versus-reality spectrum. Certainly, for investors, the year of Taylor and Trump has seen a steady rise in speculation, risk-taking and, yes, dreaming. It’s like the euphoria of 1999 and 2021, but the mix is different. There’s no Pets.com, cannabis, NFTs or EVs, but there are plenty of other indicators.

Crypto is a big part of the speculator fervour. In hopes that president-elect Donald Trump will deregulate cryptocurrencies (or should I say, regulate them even less), bitcoin surpassed US$100,000 and lesser coins such as Dogecoin have skyrocketed.

It feels as if all the upside from the Trump election (deregulation, local benefits from higher tariffs) has been absorbed into stock prices, and little of the potential downside (trade retaliation, inflation).

Business icons in the president-elect’s inner circle, like Elon Musk, are riding high. Tesla is up 75 per cent since election night with the only news being about Mr. Musk’s pay package. Meanwhile, Trump Media and Technology Group has kept the meme stock craze alive. It’s valued at more than US$7-billion despite reporting revenue of US$1-million in the September quarter.

You might wonder why Truth Social and crypto-everything are indicators of speculation and risk. It relates to the absence of something to value. Investor excitement can drive up prices in the short term, but an asset must offer some utility and ultimately produce a profit for gains to be sustainable.

There are other areas that arguably look frothy. Artificial intelligence is one. AI does have utility and will have a profound effect on how businesses operate, but is also prone to hyperbole (this time around, companies are putting AI in their names instead of .com). The question is, will the excitement and huge capital and environmental costs be accompanied by a commensurate amount of sales and profit? Will AI produce incremental revenue, or just be a feature needed to justify the price of existing products and services?

Valuations of mainstream stocks and bonds are being carried along with AI and crypto. With a few exceptions, price-to-earnings multiples are above their historical ranges, and the risk premiums on high-yield bonds (the extra yield above government bonds) are at all-time lows.

Not surprisingly, people are optimistic. Investor sentiment, which is a contrarian indicator, is moving into bullish territory.

To sum it all up, this isn’t normal. Quite the opposite. So what is a steady, long-term investor to do?

First, dust off a few investing basics and stick them on your fridge. Tenets such as “price matters.” If you pay too much, a good asset will be a bad investment.

The daily price doesn’t determine value. Value comes from revenue growth and profits.

And the mood of investors can change on a dime. It can go from bullish (greedy) to bearish (fearful) in a matter of days. (Going from bearish to bullish takes longer.)

The stickies hopefully will remind you that investment fundamentals still matter.

Second, don’t be frustrated by the craziness, but rather, use it to your advantage. If you need to set aside money to do or buy something, or if you’re retired and need to top up your spending reserve, it’s a great time to do so. If you don’t, use the strength to rebalance your portfolio back to its target asset mix.

Third, if you’re speculating or chasing the next great thing, size the bet appropriately. Professional managers are methodical about how big their stock and bond positions are, and you should be, too. The pursuit of a theme such as AI or crypto should be done in the context of a diversified portfolio.

And finally, don’t speculate with money you’ll need in the next three to five years. If it absolutely needs to be there, it’s not appropriate for riskier, long-term investment.