Tech bubble analogies

[TimmyTP]

Some entertaining analogies knocking around for the tech bubble stocks.
I want to join in, but I don't want to clog up the threads, so here we go with the contributions so far:

Roger: "Anyone old enough to remember when Goats were $3,000 a head ? I remember as a young accountant sitting down with a goat farming client and asking how he thought Goat prices at the time were justified...what is it that they produce that makes them worth $3,000 a head I asked"
Winner69: "Deer were pretty expensive back then as well weren't they?"
TimmyTP: "Ostriches were a bullet proof investment until my German relatives lost their entire investment"

Hope you enjoy and this is a better place to put this than the stock threads themselves - if not I can always remove it.

[winner69]

We pissing you off or something timmy?

Bubble analogy, how about "remember the day XRO reached $41"

Hope you enjoy

[MAC]

It's just like the last one ................

http://www.youtube.com/watch?v=dr3qPRAAnOg

[TimmyTP]

We pissing you off or something timmy?
Nothing could be further from the truth! What gave you that impression? I am enjoying the distraction from the red ink next to my CNU shares (whoops!).
Ah in terms of creating a new thread - no, not annoyed, but I was about to go off on a tangent on the XRO thread and thought I would avoid getting myself in trouble for being off-topic on a serious thread.

[Slowlearna]

It's just like the last one ................

http://www.youtube.com/watch?v=dr3qPRAAnOg

Like Like Like

[karen1]

It's just like the last one ................

http://www.youtube.com/watch?v=dr3qPRAAnOg

Love it!

Like the thread too, please don't take it down TTP, with a thread like this there'll be just one place to go to read the daily funnies...

[Stranger_Danger]

Here is the best I've got. Warren Buffett, 2000 annual report.

Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was "a bird in the hand is worth two in the bush." To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota ¾ nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Market commentators and investment managers who glibly refer to "growth" and "value" styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component, usually a plus, sometimes a minus in the value equation.

Alas, though Aesop’s proposition and the third variable,that is, interest rates, are simple, plugging in numbers for the other two variables is a difficult task. Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach.

Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in relation to value. (Let’s call this phenomenon the IBT Inefficient Bush Theory.) To be sure, an investor needs some general understanding of business economics as well as the ability to think independently to reach a well-founded positive conclusion. But the investor does not need brilliance nor blinding insights.

At the other extreme, there are many times when the most brilliant of investors can’t muster a conviction about the birds to emerge, not even when a very broad range of estimates is employed. This kind of uncertainty frequently occurs when new businesses and rapidly changing industries are under examination. In cases of this sort, any capital commitment must be labeled speculative.

Now, speculation in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it is neither illegal, immoral nor un-American. But it is not a game in which Charlie and I wish to play. We bring nothing to the party, so why should we expect to take anything home?

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities, that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Last year, we commented on the exuberance and, yes, it was irrational that prevailed, noting that investor expectations had grown to be several multiples of probable returns. One piece of evidence came from a Paine Webber-Gallup survey of investors conducted in December 1999, in which the participants were asked their opinion about the annual returns investors could expect to realize over the decade ahead. Their answers averaged 19%. That, for sure, was an irrational expectation: For American business as a whole, there couldn’t possibly be enough birds in the 2009 bush to deliver such a return.

Far more irrational still were the huge valuations that market participants were then putting on businesses almost certain to end up being of modest or no value. Yet investors, mesmerized by soaring stock prices and ignoring all else, piled into these enterprises. It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them.

This surreal scene was accompanied by much loose talk about "value creation." We readily acknowledge that there has been a huge amount of true value created in the past decade by new or young businesses, and that there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get.

What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them. Too often, an IPO, not profits, was the primary goal of a company’s promoters. At bottom, the "business model" for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers acted as eager postmen.

But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street ¾ a community in which quality control is not prized will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to "A girl in a convertible is worth five in the phonebook."). Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners. Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.

[percy]

Stranger Danger.
Thank you for posting that Buffett classic.

[Balance]

Bubble - 'when you expect some fool to buy off you at a higher price than what you bought in at.'

Bubble, Trouble & Toil - who needs that shxt?

[TimmyTP]

My useless attention span nearly stopped me reading that, Stranger Danger, but I made myself read the whole thing and it is a beauty, thank you. Incidentally, my girl is usually in the Land Cruiser, but I love the analogy!
Mac's link on my favourites now too for posterity - cheers.

[born2invest]

Do you know that if you were to buy the entire company of Xero for 4.3 billion...

For a similar price of 4.6 billion you could buy all of Port of Tauranga, Mainfreight and The Warehouse.

Interesting huh?

[JohnnyTheHorse]

Do you know that if you were to buy the entire company of Xero for 4.3 billion...

For a similar price of 4.6 billion you could buy all of Port of Tauranga, Mainfreight and The Warehouse.

Interesting huh?

Yeah but those aren't in the cloud, you just don't understand!

[Slowlearna]

I have always been told "bigger they are the harder they fall" not sure it relates to stocks?

cloud based companies sound like they have a long way to fall.

Paper profits all good just protect your capital

[biker]

Great thread. Thanks TimmyTP, MAC and Stranger_Danger.

[born2invest]

Better yet, they make $219 million of net profit after tax rather than a $18 million dollar loss.

[skid]

Its different this time... Moosie said so!

And how much are Moosies going for per head?:)

[MAC]

Yeah but those aren't in the cloud, you just don't understand!

For the price of just a single Xero share you could have the board game, same excitement none of the risk.

http://www.ebay.com/itm/Worthington-Boardgame-Tech-Bubble-Box-SW-/131022868178?pt=Games_US&hash=item1e81924ed2

[Beagle]

TimmyTP, good thread and a good idea to have it all in here, I'm beginning to think some of the Xero shareholders might be about to see their lawyers to send me a cease and desist letter if I keep posting objectivly in that thread, opps havn't checked my e.mail for half and hour maybe I've got one already LOL
Anyway..here's the story of the Great Tulip bubble, enjoy.
http://fredhenstridge.blogspot.co.nz/2013/03/the-great-tulip-bubble.html

P.S. Current price of goats is circa $70...maybe its time to give up accounting and start a goat farm, could diversify it with Alpaccas and Deer, I hear they're going pretty cheap too :)

[zs_cecil]

Here is another piece of tech bubble article from Forbes

http://www.forbes.com/sites/jessecolombo/2013/11/07/twitters-ipo-is-more-proof-that-tech-is-in-a-massive-bubble/


Think about the current situation of New Zealand's economy, it does seem that another economic crisis is coming.

High House Price, Low Interest Rate, High NZ Dollar Value, High Share price, Tech bubble, Xero Effect.

If our government raises interest rate to control house price -> higher NZ dollar value
If people sell their appreciated share and rush to buy a house -> share slumps and higher house price

Maybe I am just being too pessimistic. :cool:

[noodles]

Their misfortune will be the making of mine.

How is that? Shorting on the way down? Buying some bargains?

[Beagle]

I remember a very sage article written about why history always repeats on the markets, and the theory goes like this. Those who traded through the first bubble were usually forced to exit the market when it slumped, never to return. Those who survived the bust either moved on to other things or learnt their lesson and did not participate in the next bubble (and whose voices were subsequently ignored when calling the next bubble). New traders are fresh out of school and in their 20's, their brains are not yet mature enough to comprehend and manage risk (not opinion, but biological fact!), who believe themselves to be masters of the universe, and who having had a great deal of luck by being in the right time at the right place, go on to think they are investing geniuses making ever bigger bets on risky stocks, until the day they find out they are not. They get wiped out and about 10 years later the cycle repeats.

It seems people have forgotten what it was like in 1999 and history is doomed to repeat itself. All the "Masters of the Universe" are spouting their trading "knowledge" apparently gained over the last year or two (fresh magical bull run since 2011), who havent seen a real stock market bubble (the GFC was not, it was a banking bubble that had an impact on the stockmarket) and who have no idea what is coming for them, but who also refuse to believe the warnings, because their immature brains can't see danger coming.

It will be fun to watch the fall out. But I'm evil like that. Their misfortune will be the making of mine.

Great post...you can't tell them anything...that applies to my twenty something kids as well, so no point trying.

[Latama]

Great post...you can't tell them anything...that applies to my twenty something kids as well, so no point trying.

Haha I read that at first that you had twenty something kids, as opposed to meaning their age. Woops :)

As negative as people may see your comments, I personally respect them. I am invested in Xero and relatively new to the sharemarket, and as nice as the big hike in SP is, it's also good to have some reality kicked into me when it takes a tumble!

[blobbles]

How is that? Shorting on the way down? Buying some bargains?

Its pretty easy, cash up at or near the market peak, wait for the bear run to be close or nearly over before buying everything you can at undervalued prices.

Take FPH for example, after the GFC downturn it was selling for about $1.80 a share. If you bought then (I did), you were still getting about an 11% ROI through dividends if you looked at dividends over the past few years. A few years later its trading at $3.74 with a 5% dividend yeild... essentially doubling capital value and having pretty good dividends mostly all the way.

Do this enough times, have enough patience over the years and you will win enough times.

Currently the share market is the highest its ever been. While this is partly as a result of a tonne of new listings and good growth in NZ from some companies (XRO being an example of ridiculous growth), it does start to smell of being overvalued. I would say cashing up right now, or at least when interest rates rise (which means you can get a reasonable return from the bank), you wouldn't be doing too badly. Markets go up and down and if you can sell at the top and buy at the bottom, you are doing pretty well.

[Beagle]

Haha I read that at first that you had twenty something kids, as opposed to meaning their age. Woops :)

As negative as people may see your comments, I personally respect them. I am invested in Xero and relatively new to the sharemarket, and as nice as the big hike in SP is, it's also good to have some reality kicked into me when it takes a tumble!

Thanks. LOL If I had twenty something kids I'd be in an asylym by now :eek2: No, just two in their 20's, thankfully I managed to avoid too much consumption of the virility boosting deer velvet :) Good luck with it mate, I've said my bit in the XRO thread, people already know my viewpoint other than to add for your benifet that I think their growth rate / uptake rate will taper off very sharply over time.
Stockbrokers valuations with these sort of companies really are subject to huge amounts of conjecture and theory with far reaching projections and assumptions, based primarily on future growth projections which can be not much more than guesswork, (they don't have a defined profitable trading history like a company like Ryman has for instance, so they have very little hard trading data to work with other than customer growth), that can be so wildly inaccurate as time progresses, yet some inexperienced investors treat them as more credible than the bible itself. CSFB says it must be worth $45 so it is right...
Just because something is in print and presented on a flash looking company letterhead / fancy looking PDF doesn't mean its gospel.
Have another really good read through this and remember that based on normal standard deviations with a range of different growth assumptions, its more likely that assumptions within the middle of the range are the most probable, (scenario 2 and 3) and this would value the company at between $8.11 and $17.16.
http://www.scoop.co.nz/stories/BU1310/S00170/xero-xronz-thoughts-on-valuation.htm
Conventional investment wisdom suggests you should only put a very modest portion of your portfolio in super high risk stocks, biotech stocks and the like. Provided you follow that and use a stop-loss of say 15%, you cvould do really well and won;t lose your shirt if it all comes unstuck.

[Beagle]

^^ Thanks. No I havn't but knowing they're generally well regarded I'm sure they've done their very best to make educated projections its just that with such a wide range of future growth possibilities I doubt anyone can reliably value the company. We really are in uncharted waters. If a copy was made available to me I'd be happy to read it. I simply don't think the XRO system is the complete game changer others do, maybe its a generation thing and I really am an old dinosaur already, who knows :)

[noodles]

Usually by picking up bargains when fear rules the markets, and traders are stopped/margin called out of their holdings at dirt cheap prices. I'm kinda looking forward to the next bear market, its such a big opportunity to get really rich. I think I might have a play with shorting this time - probably through some short ETF funds in the US and Australia.

I'm not looking forward to the next bear market. However, I am looking forward to reasonable valuations. It is tough finding value and growth in this market.

I have started shorting some ASX stocks. We are starting to see flat FY14 earnings for stocks with pe's > 20. I expect these stocks to trade significantly lower if the bear does get a grip on the market. Still, I see no sign of that yet. I do see bubble signs everywhere. I think(hope) I'm prepared for a sharp correction.

[blackcap]

I'm not looking forward to the next bear market. However, I am looking forward to reasonable valuations. It is tough finding value and growth in this market.

I have started shorting some ASX stocks. We are starting to see flat FY14 earnings for stocks with pe's > 20. I expect these stocks to trade significantly lower if the bear does get a grip on the market. Still, I see no sign of that yet. I do see bubble signs everywhere. I think(hope) I'm prepared for a sharp correction.

Be careful noodles... shorting is for the brave and those with deep pockets only. I think KW summed it up nicely when he said that Bull markets run on for longer than many think. I believe we are too reaching the top for some stocks but there is plenty more room to move, especially in the ASX where we are still far behind valuations seen in 2007. But if you are worried about timing, the cheaper options would be to purchase put options. (You do pay a premium for time but your initial outlay is all you can lose whereas if you just short a stock the potential loss is unlimited)

[noodles]

Be careful noodles... shorting is for the brave and those with deep pockets only. I think KW summed it up nicely when he said that Bull markets run on for longer than many think. I believe we are too reaching the top for some stocks but there is plenty more room to move, especially in the ASX where we are still far behind valuations seen in 2007. But if you are worried about timing, the cheaper options would be to purchase put options. (You do pay a premium for time but your initial outlay is all you can lose whereas if you just short a stock the potential loss is unlimited)

Thanks for your concern blackcap. I have been trading shorts for a while now. I employ stops on my short positions. While my shorts are not as successful as my longs, there are in the black.

I agree the bull may continue for a while yet. I buy put options on the S&P 500. However, this is more for a black swan event than a bear market.

[Scottman]

Anyone read The Tycoon Reports ? Headline reads
Another $1 Trillion in Stimulus May Be Coming Soon

[peat]

Amazon is a good example of a stock that is stratospheric in price on standard metrics. Trailing PE of 1269 , Forward PE of 131. Googles respective comparisons are 27 and 19. (Figures from Yahoo).
You may argue its a retail stock but its entry into retail came through ecommerce. And it has the cloud business. So I would consider it a tech stock.

[MAC]

Into Thin Air:

http://www.stuff.co.nz/business/industries/9379414/Into-thin-air

Seems the brokers are looking to this forum for advice now .................