I just want to start this by putting on the record that I love share investment, in my mind for the long term investor shares are the best place to achieve growth in a portfolio. I’m not going to ramble on about the benefits like capital growth, dividends, franking credits or the simple fact that you can sell $10,000 if you need to (try selling just a bedroom of your investment property, you can’t).
I’m mentioning my love of shares as an investment because there is a current occurring across investment markets that I think is starting to approach bubble territory and in my mind is a waiting timebomb for the destruction of investor wealth.
I’m not talking about another GFC, subprime debt or financial derivative based crisis. In fact, this one is a lot more simple. Investors once again are no longer caring about profits.
📷
Last year over 80% of companies listing on the US market had negative earnings. This year is likely to surpass this, with LYFT and UBER showing that it is possible to have a massive cap despite not making money or in the case of UBER management publicly stating that the company “may never be profitable!”
As you can see above over 80% of companies who IP road last year had negative earnings, the last time this occur was in 2000 right before the tech wreck. Last year alone LYFT lost nearly $1 Billion!!
The argument a lot of bullish investors and analysts will put forward to defend their holdings or recommendations “like Amazon, this company is pre profit”. Let’s review a couple of key points to this argument.
1. Amazon lost roughly $6 million it’s first year, LYFT lost 160 times that.
2. This ignores survivorship bias. Notice how they don’t say this is the next Pets.com or Worldcom?? Unless the business is able to continually raise cash to cover losses, there is a huge chance the company could go bankrupt. 3. Competition. All these company’s are assuming their Software As A Service model will continue to grow at rapid rates for years at a time, no competitors will steal market share or that somehow they will become a leader in a field (often offering minimum differentiation to competition)
4. Tech giants like Microsoft, Facebook and Intel are all highly profitable and are able to purchase competitors that they like. Unfortunately, just about every analysts assumptions includes a buy out figure from one of these companies. These are smart operators who rather than pay too much will wait and pick up the pieces they like from bankruptcy proceedings.
5. Amazon investors had a 9 year period where investors were down significant amounts from the stocks highs, including a whopping 95% draw down. The stock had to go up 20x before these investors had broke even!! I don’t know too many investors that are willing to hold a losing investment for this long…
Eventually markets will realise that a lot of these style companies are significantly over valued and that the assumed eventful profits are not going to justify the price tag.
When this happens, investors will be wishing that they chosen to deploy their capital towards more traditional value based investments. The question is not so much will this happen but when will it happen.
Just remember, the difference hope and hype is just one letter. One letter that could make all the difference to the long term performance of your portfolio.
Comments