Facebook, Twitter, Steinhoff: Joys of catching a falling knife
If enough of us get together and decide to buy something, its price will go up. Be careful though
What do you say of a share that’s trading at 5% of its pre-crash price? Well, it’s a share that fell by 90%, and then halved. That’s what they used to say, back in the day, when men were men, and valuations were valuations.
The good old days, when everyone knew what the right price-earnings multiple should be, or premium to NAV or share swap ratio, or … whatever.
The truth is that we never really knew then, and we sure as hell don’t know now. And don’t give me this willing buyer-willing seller nonsense. Maybe informed buyer-informed seller, but how would you define that, and how would you really know?
Valuations have never been science. At best, they have been assurance providers, giving comfort to the parties that their negotiated outcome, by some reference, is not entirely silly. Maybe even defensible.Valuations don’t get done to find things out. They don’t explore, they confirm. But they rely on a lot of things being “normal”: the ratios and absolutes in the income statements and balance sheets – gross margins, cost to revenue, debt to equity ratio, goodwill – and yes, for now, the application of GAAP and IFRS and King IV and whatever else the financial industry comes up with to define the acceptable boundaries of rational value determination. Like I said, that was in the good old days.
Crowds (or is it herds?) determine valuations today. Thousands, if not millions, of people exercise their collective economic right to determine the value of a listed share.
Misinformed, uninformed chasers of a quick buck dive into the streams of fashionable next big ones, finding themselves in the company of equally uninformed other enthusiasts, seeking the high, the fix. Then the algorithms join in the frenzy, taking the last millisecond input to drive the next millisecond output.
Sometimes they get it right, but they often get it wrong, and they don’t know the difference. Its FOMO more than INFO. If you want to join in the rush, make sure you’re close to the door when the sentiment changes. Investor halls empty faster than they fill.It’s greed, for sure, but not just common or garden greed. It’s fashionable, necessary greed in the circles where it manifests. How else would you keep up with the display of money (not wealth) that our grownup kids compete with, fit in with?
Facebook lost about $125-billion in market capitalisation last week. The tweets weren’t about fundamental economic analysis; they were about how big that number is compared to other huge companies, some of which make real things and sell them. The one-day loss in Facebook’s valuation was bigger than the whole value of Nike, or McDonald’s, or Airbus, or Vodafone, or the whole damn Argentine Stock Exchange, if you will.
It was the biggest one-day loss in market value for a US listed company, ever.
Not to be outdone, the value of Twitter stock fell by 21%, in sympathy.
Twitter’s monthly active users declined by one million, from 336 million to 335 million a month – hardly a big deal. How can a 0.3% decline in users (the basis for valuations nowadays) explain a 21% market price slump?You should see the technical explanatory graphs and lines and circles and colours attempting to give “I told you so” advice, after the event – and, in equal numbers, giving buy and sell recommendations. What a load of rubbish to explain a one-day move!
Steinhoff is in a class of its own. That truth will take years to emerge, if it ever does, and the perpetrators of what was nothing more, or less, than a capital externalisation strategy (using inflated Steinhoff shares as a currency to buy somewhat less inflated assets offshore) will get away with it. It is not against the law to be a pied piper to the gullible wannabes, and those who aren’t should have known better.
I’m not saying don’t buy shares. By all means, have a go at the newest growth story.
Investment decisions are, however, a different matter entirely, and here fundamentals do matter, even if the growth story happens to be based on a (credible) successful client acquisition strategy that is sustainable.
I don’t know what specific companies are worth anymore, and may I say that I’m not sure anybody does. But if enough of us get together and decide to buy something, its price will go up. Be careful though, we might change our collective minds, quite fast.
Mark Barnes is CEO of the Post Office.