Chasing Hot Stocks Is Expensive

I enjoy reading CEO Prem Watsa’s annual letters, with the latest one here: 2015 Fairfax Financial Holdings Annual Letter. He’s been labelled the “Canadian Buffett”. Like Buffett, Watsa also runs an insurance conglomerates that preach value investing.

I have clipped two tables below that are particularly interesting. The first table demonstrates what happened when you chase hot stocks and the 2nd one is the latest valuation of the “unicorns”. In the first table, the only one in the group that might not belong there is Netflix, since its returns over a five-year (chart) period is monstrous. On the other hand, Netflix never looked cheap and people investing in it in the last two years were pretty much jumping on the bandwagon that they missed, hoping to score a quick financial gain. A lot of the stocks below, like Twitter and Groupon, are trading below their IPO price.

If you tune in to your favorite popular financial 24hr media channel, it would seem that there only ten companies in the world to talk about. However, the best opportunities are where nobody is looking.

Bubble stocks
Fairfax 2015 Annual Report, page 22.

The 2nd table shows the latest valuation funding from the so call “unicorns”.  A unicorn is a private startup company valued at $1 billion dollar or more. They are interesting and very disruptive in some cases like Uber and Airbnb. But it’s also important to make money. Since these companies are private, there’s no way of knowing if they are profitable. An educated guess tells me that most of these companies are bleeding cash. That’s why they constantly need more funding. And the next round of funding is always at a higher valuation. You can play that game as long the capital markets/private investors like you. But, what we are witnessing according to the table and news, valuation in the private startup world is falling apart. There a new label going around: unicorpse.  That means the bubble is bursting. Many of them cannot fund their losses internally for more than a few months and now have almost no access to external funding. Layoffs have begun in many of these companies. Money is being raised at lower valuations than the previous round of financing and the cycle is now in reverse. Uber is worth $62.5 billion?!?!

Fairfax Financial 2015 Annual Report, page 22
Fairfax Financial 2015 Annual Report, page 22
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