American Consequences - August 2017


If a firm – even a highly profitable one – grows really fast, it’s likely investors will overpay for it and lose money on their investment. If the company never gets profitable, or becomes only marginally profitable, it’s still unlikely that investors will realize an adequate return. A business has to generate enough profit relative to what an investor pays for it before it’s reasonable to expect an adequate return. None of the companies Galloway mentioned are doing anything close to that. Investors seduced by growth and vision are making these same mistakes again, right now... Losses may be the new black, but you’ll freeze to death if that’s all you’re wearing when the weather changes. When things get manic, smart investors keep their distance. How likely is it for a company to become the next Amazon? Highly unlikely. Amazon is currently valued at nearly $500 billion, even though it only earned $2.4 billion in profits last year. Uber is valued at $70 billion, but it lost $2.8 billion in 2016. Snap is valued at a little less than $20 billion, but it lost $515 million. A lot of investors will lose a lot of the money they’ve put into stocks like Snap if those companies never turn a profit. Even if they do become profitable, they’ll never earn enough IT’S NOT ‘DIFFERENT THIS TIME’

profit fast enough to grow into their current valuations. If Uber and other overvalued private companies go public at their current reported private valuations, I’m willing to bet big investor losses will result. Amazon is the model for these other companies and its bottom line is nowhere near caught up to its enormous market cap. But the would-be Amazon imitators are either barely profitable or taking huge losses (like Snap and Uber). Their value has yet to be established, yet private- and public-market investors confidently value them in the tens of billions. None of these companies are investments. They’re pure speculations. Those retail investors Galloway mentions seem to believe what no one should ever believe: It’s different this time . This time, the laws of economics have been suspended or permanently changed, and investing is no longer about cash return on invested capital or even earning any profit at all. I promise you, it’s never different this time . Profits always matter . They matter most when everyone believes they don’t, because that’s the moment of greatest vulnerability to naïve investors. Benjamin Graham – the father of value investing – once said the market is a voting machine in the short run and a weighing machine in the long run. The voting machine has elected Amazon and Snap, among others. We can’t predict how long it will take... But I expect the weighing machine to declare Amazon’s share price in

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