“Investing is the only sphere of life where victory, security and success goes to the minority and never to the majority.” —John Maynard Keynes
In the movie, Minority Report, Tom Cruise plays a policeman in a world where crimes are predicted ahead of time. Cruise’s character gets accused of a future murder and he is forced to work incredibly hard to acquit himself of the anticipated crime.
Those of us who practice long-duration value investing disciplines must constantly examine securities pricing to determine where potential future investment “crimes” are being committed. There is a long history of momentum taking over in sectors or industries, and over-confidence often becomes attached to the momentum. In his book, John Neff On Investing, Neff points out the over-confidence in technology stemming (no pun intended) from the space race with the Soviet Union in the 1960s and the technology bubble, which existed as he wrote the book in 1999.
We have developed a theoretical model at our firm for gauging the momentum and euphoria surrounding the most popular investments in the U.S. stock market. We call our concept “a well-known fact.” A well-known fact is a body of economic information that is “known” to pretty much everyone and has been acted on by almost everyone who has capital or borrowed money available.
It is our opinion that today’s well-known fact is tied to the faith the stock market has in the ability of technology companies to continue their amazing momentum. The easiest way to see this is the reaction to major announcements made by today’s euphoric darlings.
Netflix (NFLX) announced a $350 million five-year deal to engage hit-making producer, Ryan Murphy. In effect, Netflix eliminated the risks that Murphy would normally take to produce TV shows and movies. The knock-off effect of this is the depressed prices of traditional media companies whose profits and free-cash flow dwarf the technology platform companies who have jumped into the entertainment production world.
Amazon (AMZN) recently announced preliminary plans to go into the health-care and the package delivery businesses, leading to an immediate slash in the share prices of major companies in those industries (FedEx, UPS, McKesson, Cardinal Health, AmerisourceBergen, etc.). To us, it looks like a crime by basically murdering the share prices based on the fantasies of future success for Amazon. This success is supposed to come from someone who isn’t even in the industry and/or is currently a tiny player. The nice thing about Amazon is they are also paying up for TV and movie production talent, the grocery business, retail and any other business that has a large stream of revenue. After all, Amazon is a revenue growth story, since their price-to-earnings ratio (P/E) is 256 on a trailing basis as of February 16, 2018.
Well-known facts are established by media coverage, industry equity analyst unanimity, gargantuan new company headquarters, boom-town home headquarter cities and an ascribing of higher and higher intelligence to the leaders of the organization which are booming.