Recent releases of CPI and PPI are genuine news, not only because inflation is a concern of every American, but also because they contradict the prevailing narrative that it’s being brought under control. But most of the financial media has allowed news of an initial public offering (IPO) to eclipse it in scarce headline real estate, even traditionally wary and skeptical outlets.
Make no mistake … artificial intelligence is real … and it’s spectacular. It will change the world. It’s the excessive hype that burns me up. AI has been around for years, and it will be around for many more. The new thing here isn’t the technology, it’s the buzz. It’s a concerted effort to gin up excitement in order to sell the public securities at inflated prices, encouraging emotion to discourage sober number crunching.
Those of us who have been around for a while are getting big time deja vu.
By number crunching, strictly speaking I mean reading financial statements and performing discounted cash flow analysis to estimate a reasonable price to realize the return you seek given the risk. You know, the kind of stuff that made Warren Buffett rich. You can be sure the nice folks selling the investment have thought it through. Unfortunately, most “retail” (their respectful word for you) investors can’t be bothered … it’s boring and easily drowned out by dazzling stories that engage the emotional centers of the brain. And the financial media know it.
”It’s ten times oversubscribed!” (psst … hey buddy, everybody wants this … don’t miss out!)…
That’s one of the reasons I so like this quote from Sun Microsystems’ CEO Scott McNealy. It packages the concept of number crunching in a brisk, digestible form accessible to even the most innumerate investor:
”At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
Another great thing is the context … the aftermath of the dotcom bubble. This is where the deja vu comes in … investors were sucked in with exciting visions of the future and overlooked crunching the numbers. In the cold light of day, after they’ve lost their retirements, investors blinded by emotion will one day once again be asked “What were you thinking?”
The correct answer, of course, is ‘I wasn’t. I was feeling.’
As a rule of thumb, a shorthand way to screen out the worst offenders is to watch for hype. If it’s something you can buy and it’s all over the headlines, your spidey senses should go on alert. They’re not trying to make you money; they’re trying to get your money. After thirty years of investing, the more exciting the pitch is, the less I want it. If you’re speculatively inclined and calmly, rationally anticipate a greater tool to soon pay you even more for it, it might be something you do with money you can afford to lose.
But keep it at ARM’s length.