The valuation of shares is based on four criteria. They are (1) historic performance, (2) current management perofrmance, (3) future prospects, and finally peer group opinion. Henry Ford famously said, “History is bunk.” This disposes of (1). Why is this especially true in relation to investing? Because points 2- 4 are also bunk. This leaves the investor in a bit of a bind.
The great Jeff Bezos created Amazon in 1994. Amazon was floated on the US Stock Market on 15th May 1995 and $1000 invested then would now be worth $239,045 (November 2013 when this blog was written). Any investment was therefore predicated entirely on the idea of Internet catalogue retailing. Punters* punting on Amazon have had a massive pay- out. Compare Steve Whitely at Exeter Racecourse (UK). He won £1.45M for a £2 bet on a six horse accumulator on 8th March 2011. A massively improbable bet that struck gold but it wasn’t gambling it was punting.
Vodafone had everything going for it in 1999. Mobile (cell) phones were in rapid take- off and tech companies were unstoppable. Vodafone paid £112bn** (c. $200bn) for Mannesmann and the new combined company was worth £228bn. Vodafone (November 2013) is now worth £112bn*** £116bn less than than 14 years earlier. Times- Warner(USA) is even worse. They bought AOL for £200bn in January 2000. The combined company was valued at $380bn: Just under ten years later the company was valued at $38bn. A 90% drop in value. Management were punters. They behaved like all temporarily successful punters. They doubled their bet. The ‘Masters of the Universe’ running RBS Bank Group did exactly the same in 2007. They literally bankrupted the company and with an additional flourish, wrecked the UK economy. Management in all three companies were paid punters getting the buzz but not picking up the tab.
All the world’s stock markets collapsed on Monday 19th October 1987. The US Dow Jones fell 22.61% and the UK FTSE fell 26.45%. In other words anyone, anyone at all, the savviest, cleverest investor in the world lost between a fifth and a quarter of their investment if they had invested on Friday 16th October. They lost that in a day! So why did it happen? On 15th and 16th October Iran missile attacked oil tankers in Kuwait. Fear stampeded stockbrokers. The collective wisdom of stockbrokers was ‘get out of your investments NOW! So they did. They forgot that desperate sellers have prices imposed on them. Black Monday was born. Obviously if they had known any economic history they’d have known the dictum of the Rothschild family, “Buy when the guns start firing.” This disposes of the importance of stockbroker peer group opinion about your investments.
Therefore the Stock Market operates in a haze of opinion and herd like behaviour. An investors’ life is bi- polar oscillating between suicidal pessimism and delusional optimism. Rational analysis is impossible because there are too many ‘unknown unknowns’. All investors are punters.
*A punter is a person who gambles but doesn’t know what they are doing. See my blog ‘Gambling, Gamblers and Punters’ for a full discussion
**If corrected for inflation that £112bn becomes £164.57bn in 2013 monetary terms.
***£56bn in 1999 money