American Consequences - August 2017

don’t matter anymore.” He said they don’t matter to retail investors anymore . And he’s right. That’s the real problem here. (Galloway is more in tune with the financial markets than I’d previously thought. He recently pointed out some fin-de-siècle warning signs in retail and technology and noted that it’s been several years since the last market crash.) Mom and Pop have fallen in love with stories about companies that don’t make any money because they think they’re buying the next Amazon. They’re buying equities with the mentality of a lottery-ticket buyer. The world as it exists : Equity only has value over the long term if a company earns a profit. The world as investors see it : Fast-growing, visionary businesses will succeed at becoming the next Amazon despite massive losses and extremely low odds of success. WHEN THINGS GET MANIC, SMART INVESTORS KEEP THEIR DISTANCE Investors have gotten manic many times in the past, frequently for profitless companies. But profits or not, it always turns out badly. Three of the six manias in my lifetime featured profitless companies roaring to great heights. Each time, investors forgot there’s no such thing as an investment that’s good at any price . The first one happened around the time I was born in the early 1960s. Technology companies with “-tron” or “-onics” in their

Investors love it, but it’s not profitable. Snap lost $373 million in 2015 and $515 million last year. Shortly after its IPO earlier this year, it reported a $2.2 billion loss in the first quarter of 2017. The share price fell 20% the next day. Information on ride-hailing service Uber is limited since it’s not a public company. But various sources say it produced $3.8 billion in revenue in the first nine months of 2016 – nearly triple the $1.4 billion it did in the same period of 2015. And yet, it reportedly lost $2.8 billion in 2016. Galloway stared out at his audience and dryly concluded, “ Loss is the new black .” In other words... vision, growth, and losses have replaced profitability as the business attributes that investors most reliably reward in the marketplace . Again, that Amazon is finally profitable doesn’t matter. It’s not Amazon’s profitability that the new loss makers believe they’re imitating. They’re imitating the quest for rapid growth and dominance without a priority on profitability – a goal achieved very, very rarely. He continued... This might not end well. This might

be the wrong strategy long term. It might have some underpinnings of something scary brewing in the

economy... But the reality is that retail investors love this model of vision and growth, and they ignore profits or a lack thereof. I must credit Galloway for not saying, “Profits

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