Thursday, October 23, 2014

Stock Talk - 5

A new reality has come to the stock market:  The founders and leaders of the flashiest companies listed on the stock market don’t give a damn what their stock does.  This may be good or it may be bad, but them’s the facts, and you should be aware of them.

Amazon reported disappointing earnings today, and the stock promptly tanked 10 percent. Do you think Jeff Bezos cares? Do you think the founders of Google or Facebook or Alibaba really care if they or their key employees are worth a few hundred million less than they were a week ago?  They do not, and, as I say, that may be a good thing – as long as you understand the fact.

Years ago, when I was serenading Wall Street, it used to be different. People left big companies to join start-ups on the promise of wealth that would eventually be realized via stock options. Today, a hot company goes public and  - wham! – dozens of new millionaires or billionaires are minted overnight, and if years later the stock drops 10 percent in a day, Jeff Bezos, Mark Zuckerberg, and Larry Page and their top lieutenants are still very, very wealthy.

Given that reality, how should you invest?  Personally, I don’t invest in Amazon or Google or Facebook or Alibaba, though for many investors they have been great investments. It’s just that I like my companies’ leaders to have skin in the game.  Mind you, I don’t expect the CEO to be a pauper; that would be unrealistic. But I do want him or her to care what the stock does, just as I care.

I have nothing against great wealth. God bless Bill Gates and the others on the Fortune list.  The opportunity to make unlimited wealth is one of the qualities that has made the United States the most powerful nation on the planet. I devoutly hope that the CEOs of the companies I invest in will make billions and billions. But by then I will be long gone, looking for the next batch of billionaire wannabes.

Monday, October 06, 2014

Stock Talk - 4

The total stock-market valuation of Netflix, Amazon, and Facebook is about $400 billion, or about the GNP of Sweden. Amazon stock sells for hundreds of times earnings, Netflix sells for over 100 times earnings, and Facebook sells for "only" 80 times earnings. Now, it's true that if you bought the three stocks a year or two ago, you'd have made a pile of money. And I missed the boat on all three. But nosebleed territory is not for me, because as soon as I bought Amazon at $320 a share, it would drop 20 percent, as it did from its high of about $400 a share. Life's too short to spend it throwing dice.

The financial news today is that Hewlett-Packard has decided to split into two companies. Now, I happen to know H-P well, because I spent a lot of time competing against them. As a matter of fact, in 1956 I remarked to the then Chairman of the Company I worked for, "H-P has just passed us in sales." His answer: "They'll pass us on the way down, too."

It never happened, and H-P went on to become a Goliath in electronics, before it lost its way, while being run by Carly Fiorina, Mark Hurd, Leo Apotheker, and now Meg Whitman. You know what all of these people have in common? They were all outsiders. Think of it: The Company was saying to its 300,000-plus employees, "We don't think any of you is capable of running this Company, so we're bringing in someone who hasn't worked for H-P for a day." This is not a knock on any of the chosen CEOs; I happen to think Meg Whitman is a very savvy manager. But really, doesn't it prove that at H-P leadership succession hasn't been a priority since Dave Packard and Bill Hewlett departed? So H-P is not on my stock-market shopping list.

Some trends are well established, and you would be a fool to ignore them. So you will probably not invest in newspapers and magazines. But if you dig down a bit further, you will find other trends worth noting. Shopping malls are likely to become dinosaurs, although it might take a while. So will movie theaters, as home screens get larger and cinema screens get smaller. It may take years for these trends to play out, but do you want to invest your hard-earned money in endangered species?

The price of oil has been tanking (pun intended) lately, and so the oil stocks have been falling. But this is not a long-term trend. There are just too many cars and factories dependent on oil. So if a dividend-paying oil stock is falling, that means the yield is increasing, despite the turmoil at OPEC. So not all collapses are bad, and though I am happy to see the pump price at $3.30, I am too much of a realist to sell my oil stocks.