Take ‘Potential Winners’ With a Grain of Salt

“History may not repeat itself. But it rhymes.” This quote, attributed to Mark Twain, comes to mind amid today’s crypto fallout and SEC crackdown on digital assets and endorsements. Whether you think now is the end for digital assets or the start of a larger rebound, none of this is new. Folks have speculated on long-term potential winners throughout history. Something like it will likely happen again, in my view. When and if it does, remember: No matter how compelling their story, trying to pick potential long-range winners is a misguided approach to investing. One stark reminder? A huge, salty body of water in Southern California’s arid desert: The Salton Sea.

“Miles and miles of date palms, grapefruit, vineyards. Snow-capped mountains … Water so smooth it’s become the center of water skiing.”^[i] That is how one 1958 developer described the Salton Sea—years before its surrounding resorts fell into disrepair and its shores developed an unappealing layer of sun-bleached fish skeletons. This developer was among many who envisioned a new Palm Springs at the then-idyllic Salton Sea (which was created via human error in 1905). They purchased cheap seaside land, built some hasty infrastructure, planted palm trees and mapped communities.^[ii] Then came promotional events featuring music, food and real estate booths by the Sea.^[iii] Investors and prospective homebuyers poured in, buying up mostly empty lots with seemingly huge potential. Airplane tours even allowed investors to choose lots from the sky.^[iv] Soon, the Salton Sea grew into a desirable vacation destination, with thriving resorts, golfing, fishing and boat races. Famous folks like Frank Sinatra, The Beach Boys and President Eisenhower all visited.^[v]

Then, ecological disaster struck. In the 1970s, flooding caused by the sea’s lack of outflow put businesses literally underwater.^[vi] Wrecked properties were abandoned. Tourism tanked. Furthermore, the sea’s inflows were mostly agricultural runoff—toxic, and too little to replenish water lost via evaporation. As the sea’s fresh water evaporated, salt from the lakebed raised salinity while fertilizer from the runoff caused algal blooms. Fish and birds died off en masse—creating sickly, stinking beaches and destroying dreams of a resort resurrection.^[vii] These looming issues were known to researchers in advance, but their warnings were mostly ignored.^[viii] Now? The Salton Sea is an ecological time bomb. Toxic dust on the sea floor is barely contained beneath the slowly evaporating surface.

Salton Sea investor missteps seem obvious in hindsight, but people commit the same errors now—and likely will again. It is easy to wonder why anyone would ignore warnings of their desirable seaside location becoming a stagnant reservoir. But 2021 and 2022’s digital asset craze and collapse provide a modern example. Consider NFTs (non-fungible tokens). Major publications highlighted their risks in March 2021—before NFT sales surged. Among them: High volatility, illiquidity, ownership quirks, subjective valuations, fraud and market manipulation.^[ix] People bought anyway—and enthusiasm drove oversupply. Plus, as with the Salton Sea, celebrity buzz made it easier to overlook warnings—substitute Frank Sinatra and The Beach Boys’ luxury resort visits with high-profile celebrity NFT hype in recent years—some of whom now face potential legal or regulatory action. Hence, it is important to understand what you are buying—including the associated risks—and why. Always ask if you are driven by confirmation bias, FOMO (fear of missing out) or headline hype.

Maybe you think a certain company’s stock, cryptocurrency or other asset is a poor idea, but FOMO entices you anyway, thinking others will pile in. You convince yourself you will sell before they do because you know better. Likewise, Salton Sea investors weren’t necessarily naïve or uninformed—many likely understood the risks but planned to sell after prices rose.^[x] That is basically what the early developer, M. Penn Phillips, did, whether he had it in mind or not. He made a killing by selling early—others, not so much.^[xi] This is “greater fools” thinking, the idea that you are smarter and earlier than others and “greater fools” will buy later. But it is generally a bad idea to buy something with known weak fundamentals and cross your fingers someone buys from you later. It implies you can play off and time sentiment swings. Sir Isaac Newton said it best, after losing his life savings speculating: “I can predict the movement of heavenly bodies, but not the madness of crowds.”^[xii]

When investing, most of the time, investors are looking to fund long-term objectives, like retirement. But no one can know today what the next 30 years holds—so how can investors approach this? Diversification is key, in my view, since it allows you to capture broad market growth. For example, the S&P 500 has delivered 10.0% annualized returns since good data begin in 1925.^[xiii] Further, focus on probabilities, not possibilities. Yes, successfully picking a long-term, far-flung winner can possibly work out and deliver massive gains, but it is ultimately guesswork. In my view, stocks look 3 – 30 months ahead, not 3 – 30 years. Speculation involves depreciation risk—and the risk of your investment disappearing entirely. Diversification offers a more reliable long-term approach, allowing investors to fund long-term goals, like retirement, without superhuman clairvoyance. It is a gradual and patient process.

Whatever comes next in today’s digital asset saga, don’t forget it when the next craze appears. Remember the excitement many felt in 2021—and the obvious shortcomings now visible in hindsight. Or, for a starker visual, think of the Salton Sea. Long-term potential can evaporate quickly—and luxury resort towns can become watery wastes.