Investments do rise and do fall in value and we strongly advise that professional advice is taken before investing your money
When investing your hard-earned money, dare I say that are you investing with the intention of growing your capital!
Now there are lots of investing styles and strategies that you can adopt, which is a whole other topic, outside the remit of this article.
However, for the clients we look after, they tend to focus on losses more than gains, which is a normal human behaviour, that we term ‘loss aversion’. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gains (Kahneman & Tversky, 1979).
I was reading the Daily Mail (dated 21st April 2018) and its Article on Netflix.
To state the obvious, to make a positive return it is important not to lose money and not to forget this simple but important rule.
When we (SMAssociates) are selecting fund managers we are conscious to focus on managers who have shown consistent investment selection and returns, so that the investment journey our clients are taking is positioned to benefit from potential positive returns whilst minimising losses - easier said than done! So what’s your point Steve I hear you say, my point is this, as I write, US indices are riding high typically focusing on ‘FANG’ stocks (Facebook, Amazon Netflix’s and Google).
Looking at the data on Netflix, which is might I say, the online version of the now defunct Blockbuster video. 'One business you went in and collected your video, the other business delivers through your broadband'.
Using the article's data, the business is valued c$103billion which is similar in value to a long established business, Disney, and over the last 21 years Netflix has had sales of $37.7 bn and banked $2.1 bn. What this says to me is that if I brought the whole company for $103bn (and lets face it, if I did, I would not be writing this article) the person selling me his shares would be doing very well indeed. Up to this point the shareholders only achieved $2.1 bn on the companies sales - not a good return I would suggest, but the capital gain for the shareholder was fantastic. Currently, the company is investing heavily into content for its subscribers (c$5bn) to grow its business and maintain its prospects. Clearly this is what investors must be focusing on as one day these same investors will want the company to be worth more than today’s valuation and producing dividends as a means of shareholder returns.
So here is the conundrum as I see it -
If you are buying this company today, the return that you are receiving is low in terms of company earnings/profits, but you would be buying for future growth expectation which may already be ‘baked into the cake’. Could you for the same money buy another company with good growth prospects which is not as expensive? I would suggest that yes you can. It is this type of analysis that we consider when our fund managers present their portfolios, because expensive (highly rated) companies that fail to meet investor expectations have a high probability of losing investors money.
A speculator I would suggest would pour scorn on my analysis but for a ‘momentum trader/speculator’’ the price may go higher for lots of reasons. Would I be keen for our clients to hold this high-risk investment - no, I would not be keen as the price that you are paying is very steep and it is priced to ‘perfection’ i.e. it cannot make any mistakes or the share price will drop and probably drop substantially.
My Nan would say 'I could get a better return in the bank based on the figures disclosed!' And she would be right, especially when taking risk/reward into consideration. Fads come and go, but what clients want to do is to enjoy their wealth for a long time and even pass it to their children. It is for this reason that we, on behalf of our clients, leave these opportunities to others and scrutinise the risks our fund managers are taking with our client’s monies. It has taken some 15 years plus for the technology funds to recover the loses of the last ‘tech boom’, so if you are a ‘speculator’ be wary, for us ‘investors’ we like the slow and steady.
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
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