The Big Picture

“The thing about unicorns is they don’t exist.”  -David Einhorn

A unicorn is a mythical creature found throughout history in cultural folklore. In finance, a unicorn is a company that has an initial valuation of over $1 Billion, and is not profitable. You read that right, no profits! The term was coined by venture capitalist Aileen Lee in 2013 (Wiki).

In short, a unicorn is a company with a remarkable amount of future expectations priced in. Possibly years! There have been several unicorn companies taken public throughout this cycle. The vast majority have left much to be wanted. While it is fairly simple to identify and avoid these names there is still significant demand for them. The hype surrounding these companies is the primary driver of the demand. It is also driven by FOMO – or “fear of missing out!” Nobody wants that! This makes me think of an important rule in stock analysis.

Rule: A good product, service, or idea does not always equate to a good stock. 

In fact, some of the best ideas often take a significant amount of time to come to fruition. As well as several iterations along the way.

Have a Plan and a Process!

From the Trenches

“We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.” -Lyft Management

For those who haven’t heard of Lyft, it is a transportation company and in my humble opinion it is an excellent service. Lyft is the latest company to IPO (initial public offering) with unicorn status.

Hmmm… So if “we may not achieve profitability” then what are we investing in exactly? I may need to go back and review some of the basics of investing to ensure I have not missed a chapter… 

All joking aside, the unicorn issue is an interesting one. If company management is comfortable enough to proclaim that profitability may never be obtained then we have some assessing to do regarding what the investment expectation will be. The only rational reason to buy a unicorn is if the investor believes that profitability will eventually be found. That is (or should be) the reason. The only other plausible explanation is the belief in the Greater Fool Theory (see my post from Aug. 2016); someone will be available in the future to buy the shares at a higher price. This belief is highly speculative, which may be what unicorn investing is all about. Pure speculation. However, that is not what most investors believe. They seem to think it is a sure thing.

“Money isn’t made in the markets from buying a good company. Money is made in the markets from buying a good company well.”

The price you pay is a very critical stage of the investing process. One of a few.

Many of the exciting, popular, and intriguing companies are very likely overpriced. Why? Because they are exciting, popular, and intriguing to the rest of the market as well. They are not a secret! 

Bottom line: Unicorns do not exist, a good company does not always become a good stock. Investing is not about popularity, however popularity may be helpful if your price was right and you are not the last without a chair when the music stops. 

The Weeds

“When someone told me I live in a fantasy land I nearly fell off my unicorn!”

Just some humor…

Market Update

We have had quite the recovery from the December lows. Much to the surprise of many market practitioners. As things tend to be clearer with the power of hindsight; it was likely  policy error while the economy was slowing that caused the correction. It was the reversal of policy that recovered the correction. We have discussed slowing for over a year, and the slowing is still evident. Chicken or the egg? Did the Fed cause the slowing by raising interest rates or did the Fed react to the slowing and now reverse course? I believe it was the latter…

Below is the chart of the S&P 500 from August 2018 through the present. As you can see from the headlines, there was considerable concern over Fed policy and disagreements around policy actions. Basically we witnessed a complete flip from hawkish policy to dovish policy.

The deeper issue: Have we entered a period in which market data and actual economic performance is playing second fiddle to policy? Or have we entered a period where Fed policy is entirely reactionary on the state of the financial markets? Has the primary factor in market performance become whether Fed policy is accommodative or not? In other words, will the Fed always be at-the-ready to rescue the stock market? 

These questions have been on the minds of many for several years now. Once direct stimulus ended in 2014 there was a belief that the market was on its own. However, this certainly seems not to be the case.

Bottom Line: Have the financial markets become a public utility? I.e. Are policy makers determined to “manage” the markets along with other monetary and interest rate policies?