American Consequences - August 2017

need of dramatic weight loss and to encourage Snap to get its affairs in order and spend time with loved ones. Amazon will remain a fantastic business, but its share price could correct sharply (at which time it could be a great buy). If Snap doesn’t stop losing money within a couple years, it could go bankrupt. Equity gets its value from whatever is left over after a company pays everybody else. Equity investors are the least senior and riskiest claim on a corporation’s assets and earnings. When a company liquidates, equity holders are the last to get paid, after (in order of seniority) secured creditors, unpaid wage earners, taxes, trade creditors, unsecured debt holders, subordinated unsecured debt holders, and preferred stockholders (if any). Even if the company never liquidates, all those people must be paid before equity holders can get dividends. Equity only has value if there’s something left over for investors after all those other commitments are met. That excess is cash profit . Equity only has value if a company earns a profit . If you think “this time is different” and we’re in a “new era” where profitability doesn’t matter to equity investors, you’re wrong.

It’s never “different this time” when it comes to human nature. Solomon knew this. In Ecclesiastes 1:9, (according to tradition) he wrote, “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” Shakespeare knew it. He wrote in Sonnet 59... If there be nothing new, but that which is Hath been before, how are our brains beguil’d, Which, labouring for invention, bear amiss The second burthen of a former child! Philosopher George Santayana knew it. He wrote, “When experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.” If baseball legend Yogi Berra were alive, surely he’d say the mania in equities is “like déjà vu all over again.” Fast-growing, visionary companies are alluring, no doubt about it. They seem like easy money. And most people just don’t have the kind of memory you’d need to resist the apparent allure of easy money in public- securities markets. But to not get killed in stocks – and to make money in the aftermath of a market mania – you must look beyond the current emotionally charged moment to a time when it will seem stupid to have done what everyone is doing today.

If baseball legend Yogi Berra were alive, surely he’d say the mania in equities is “like déjà vu all over again.”

American Consequences | 53

Made with FlippingBook Online document