Michael Farr: SPACs are the new market bubble

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CNBC contributor Michael Farr cautions investors against investing in the SPAC boom.

People wearing protective masks enter the New York Stock Exchange in New York, U.S., on Monday, Sept. 14, 2020. U.S. stocks touched a more than one-week high amid a flurry of deal activity and signs of progress toward a coronavirus vaccine. The dollar weakened and Treasuries were little changed.Market bubbles are always a surprise and always expected.

This was a new world where value was determined by the number of clicks and the number of eyeballs a website received. According to Investopedia, a SPAC is "a company with no commercial operations that is formed strictly to raise capital through an initial public offering for the purpose of acquiring an existing company."In recent years, they've gone mainstream, attracting big-name underwriters and investors and raising record amounts of IPO money. In 2020, more than 50 SPACs have been formed in the U.S., raising some $21.5 billion as of the beginning of August.

It is rational to identify sources of potential upside for any company; indeed identifying potential avenues of growth is essential for diligent management. Finance professionals call these kinds of potential but uncertain sources of upside "real options." While I lost out on the early years of huge gains in that stock, that same discipline that relies on sound fundamentals also kept me from buying dozens and dozens of other companies that are no longer in business .

 

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