Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
If you don’t understand it don’t buy it. View shares as part ownership of a business, not as gambling counters in a game of chance, where you barely understand the rules. Be a business analyst (rather than a share analyst).
There seems to be a virus that sweeps across the professional and private share-buying communities inducing many of them to place money in things they do not understand. They often don’t have a clue about the underlying business of say, fintech, social media platforms or bio-pharmaceuticals, but they bet enormous sums on hope of a good outcome. I suppose they rely on the fingers-crossed method.
Consider the 2017 IPO of Snap Inc. Its returns to shareholders are going to be deeply buried for a long time. Annual revenue was $405m and losses over $500m. And yet its shares sold for 18 times revenues expected in the year after flotation – not profits, but 18 times SALES RECEIPTS! That is a market capitalisation of $30bn, ahead of Kelloggs, a company with a track record more than a century long.
It’s even worse. How about this for blind faith in a glorious future: the shares sold in the IPO carry no voting rights. Eighty-eight percent of the voting shares were held by 26-year old Even Spiegel and business partner Bobby Murphy.
This means that share buyers are trusting not only that Snap will not be superseded, or become unfashionable, but also that the dominant founders will treat them right when a profit finally emerges. Snap shareholders also need to worry about Facebook just copying all its best ideas (it owns Instagram).
While the virus-infected are getting all worked up about what might be – if only their company becomes the dominant network or the blockbuster drug supplier – they overlook the mundane company that just churns out profits year after year. OK, it might have a proven record, some historic earnings facts to observe, but it is a bit boring; nothing like as exciting as the dream of making it big one day by holding shares in a company with no profit record, that burns up millions every couple of weeks. After all, it might be the next Microsoft, the next Uber or the next Amgen. Of course, most of them will never be the “one”, they will be also-rans.
Similar pandemics have been inflicted on mankind in the past. For example, in the 1920s the new technology included the magic of electricity, wireless, movies and the telephone. Punters said they didn’t need to understand the business model or the competitive environment; they didn’t need to know whether the company had a strong economic franchise with pricing power. Nor to judge the quality of these factors against the price being asked for the share.
No! All they needed to know was there would be growth in sales – profits would follow, automatically, right?
Growth in sales there was; massive increases in consumer well-being there was. But most of the companies went bottom-up.
And yet the investors of the 1920s had seen this picture before and had not learned from history. Around 1900-10 there were around 500 US car manufacturers. Money poured into the pioneers. But by the 1920s, after many bankruptcies and takeovers, only three really counted, Ford, General Motors and Chrysler. If you had bought into the right company at the right time you would have done well. But to raise your odds from random chance you need to do some real analysis.
You need to analyse the business. What is its value? To estimate value you need to obtain facts – not try to value expectation and hope! The relevant facts include earnings that the business generated in years gone by; because it is these ………………………….
………………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
