Speculation, Innovation, and Permanent Loss

Doug Walters, CFA

Many investors equate risk with volatility, but history suggests the greater danger is often permanent loss of capital. This week we examine the difference, using recent examples from high-profile IPOs, cryptocurrencies, and rapidly appreciating market segments to illustrate why valuation still matters.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

In our industry, risk is often over-simplified as “volatility”… how dramatically (or not) an investment’s price moves up and down over time. In practice, investors often spend significant time worrying about these short-term moves, particularly when they are declines. But history suggests that temporary setbacks are just part of the journey. A more important risk is permanent loss. This occurs when an asset ultimately fails to justify the price that investors paid for it. Unfortunately, time often does not heal these mistakes.

An IPO Misfire

We wrote about permanent loss of capital back in February. What has us thinking about it again is SpaceX. As I type on Friday, the shares are off 46% from their peak¹, well below their day one indication. SpaceX is clearly an innovative business, with industry-leading positions in satellite communications, rocket launches, and space infrastructure. But was it a good investment at the price investors were asked to pay?

Only time will answer the investment question. But for those who seek to avoid permanent loss of capital, this year’s IPO of SpaceX was a risk worth avoiding, given the billions of dollars of losses reported in its prospectus² and trillion dollars plus debut valuation. Investors were effectively being asked to place a value on future dominance in an industry that is still in its infancy. That is even before considering the research³ that shows that the average IPO underperforms during its first year as a public company.

Built on Faith

But at least SpaceX has revenue. The same cannot be said of cryptocurrencies. Coins such as Bitcoin derive their value primarily from faith that, in the future, someone will ascribe more value to it. There are no earnings, no cash flows, and no assets to put a floor on their value. The true value is in theory its utility as an alternative currency. Yet, because of its volatility, it’s not a useful currency. Even criminal activity is exiting for stablecoins⁴. That does not mean Bitcoin cannot increase in value. It simply means the range of possible outcomes is enormous because there is limited fundamental value to fall back on if sentiment changes.

Trimming Risks

Avoiding permanent loss goes beyond obvious examples like cryptocurrencies. When areas of the market experience substantial appreciation and become increasingly dependent on a narrow set of companies or sectors, we may take the opportunity to reallocate. The objective is not to predict a downturn. Rather, it is to manage the risk that future results fall short of the expectations already embedded in prices. By trimming exposures that have become more concentrated and reallocating toward areas with more attractive risk-reward characteristics, we seek to reduce the potential for permanent capital impairment while maintaining exposure to long-term growth opportunities.

As long-term investors, our goal is not to avoid innovation or dismiss new ideas. Many of today’s leading companies were once viewed as speculative. Our focus is on ensuring that the price paid remains connected to a reasonable estimate of underlying value. Market declines are uncomfortable, but they are often temporary. Permanent losses are far more damaging. In the long run, avoiding investments where expectations dramatically exceed fundamentals can be just as important as finding the next great opportunity.

1. 6/16/26 intraday peak to 7/17/2026 close, Factset

2. $4.9B net loss per Spacex ipo prospectus, 5/20/2026

3. Ritter, Jay R., “Initial Public Offerings: Updated Long-run Statistics,” University of Florida, Warrington College of Business (3/23/2026).

4. The Chainalysis 2026 crypto crime report, 1/8/2026, Chainalysis

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Unknown

One thing to watch

Last week’s positive inflation surprise on CPI number (3.5% versus 3.9% expectation) did not give US equities enough of a boost to finish positive on the week.

This week our eyes are on the early days of the corporate earnings season. Technology names like Alphabet, IBM and Intel will be in focus as investors evaluate the sustainability of the AI investment boom.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $3 billion, as of 6/3/26.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.