By Brad Thomason, CPA
Do you remember when people used to go to a store if they wanted to buy a book? I do. I liked doing that. I still do, actually. There’s a great used book store near our office that I have to be really on the ball about limiting my visits. When I’m not diligent I end up with this growing stack of paperbacks, with an average cost of like $2.17 each, that implies I have weeks if not months of spare time coming up in which to read them all. Which of course I don’t.
I mention that because Amazon released earnings yesterday. They made $3.27 a share, well ahead of consensus estimates. The stock moved higher in after-hours trading as a result.
I remember when Amazon first came on the scene. Everyone was going nuts. I didn’t get it. Their business model seemed to be based on selling merchandise at less than cost, and trying to make it up on volume. Which sounds like a Saturday Night Live skit (and actually was years ago; Google SNL Change Bank).
Well, as we now know they were doing a whole lot more than just selling books. So clearly my initial perception was wrong.
Today I’m looking at how a company that makes $3.27 a share can be trading for $1,600 a share. I don’t get it. Based on the fact that I was wrong before, we have to at least stay open to the possibility that I’m wrong again.
I realize that the standard answer would be for someone to tell me that it’s based on growth potential. OK. But given how big Amazon already is, I’m not sure where they are going to grow, at least not in sufficient measure to catch up to that valuation. Although maybe the whole rocket company is because they are aware of several inhabited planets that the rest of us don’t know about. But in terms of earthly expansion, I’m back to where we started: I don’t get it.
Now, persons in my business should probably be cautious about trafficking the idea that they don’t know something or don’t understand something. People seek advice from those who (supposedly) know more. Certainty sells. I do get all of that.
But there’s a larger point here, and that’s the reason I chose this topic. Sometimes things in the investing world don’t work the way you think they are going to. And I think that is a very important thing for all investors to keep front and center at all times.
No sensible person would have predicted that selling below cost was a route to global domination. No sensible person would have predicted that people would be clamoring to buy even more shares of a company – any company – with a P/E north of 400. But here we are.
Investments are not obligated to do what you think they are going to do. Investments are not bound by only those things which you can understand. That is the nature of true investment risk. Not some goofy set of calculations based on strained statistical models, nor arcane indirect measurements with intellectual-sounding Greek names.
When you buy an investment, you are signing up for “this may not go the way we think it will go.” That may end up being a good thing. Or it may go the other way. But that’s a permanent part of the landscape, and you need to know what you are getting yourself into beforehand.
In the face of unpredictable possibilities, confessing ignorance is not a crime, a sin, nor an indication of diminished mental capacity. In fact, if you think about it, to act like you do know – or even can know – when you really can’t, is the behavior which ought to be frowned upon.
In our culture though, that’s not a commonly held view. Or at least not a view which is commonly acted upon.
However, as an investor, part of your success will come from understanding the nature of what you are working with. Failing to accept certain realities creates blind spots which can hurt you. And assuming you know more than you really do can lead to mistakes which can be very costly.
So just be careful, ok? You need to do everything you can to be sensible as an investor; but part of that is being comfortable with the fact that your investments are not required to make sense. They win or lose completely independent of what you think ought to happen.
By Brad Thomason, CPA
There was no shortage of details one could point to in observing that the two places were very different. But the one that caught my attention, and really summed up the whole trip, was the price of the gasoline.
I’d pulled into the service station just outside of Fort Lauderdale, and paid $2.97 a gallon. Two days later, back in Birmingham, I filled up for $2.19.
We’ve all heard the old expression that the three most important factors in a real estate deal are location, location and location. But even though we’ve all heard that, I wonder how often we lose sight of just how profound the differences can be. The range of possibilities is, at times, far wider than would otherwise seem rational.
Two houses which look basically the same can be so different in terms of being an investment candidate that it boggles the mind.
I can’t explain why that happens, at least not all of the time. Sometimes it’s because of a big difference in real estate tax rates. Sometimes it’s because the cost of the land it’s sitting on is so different. Or maybe it’s not even directly related, like the quality of area schools (whether real or simply perceived, and tied up in matters of social status).
But sometimes, it just is.
Which is fine. Because ultimately, the why doesn’t matter. Just because you can explain why you got mediocre results, it doesn’t make the mediocre results OK, right?
If the type of real estate deal you want to do doesn’t work in a particular area, it is almost always better to do it elsewhere, rather than try to force the local deal to fit the template you’ve decided it ought to have. With no disrespect intended, you simply do not have the power to recast reality in that particular way.
So don’t try.
If the deal you want can’t be found where you are looking, change locations, or don’t do the deal. It’s not like there are any real limits on the number of possible investments out there. So don’t let yourself get lulled into volunteering for constraints which don’t exist, nor ignore factors which you can’t change, but can easily avoid.
At least that’s what I would tell you had you asked for my advice on that matter.
By Brad Thomason, CPA
So I got a speeding ticket the other day. My three kids, all of whom are teenagers, were in the car with me when it happened. I did not ask specifically, but I would not be surprised to learn that, from their perspective, it is the funniest thing they’ve witnessed all year. Give them credit for having gotten most of their laughing out of the way by the time I did the walk of shame back from the trooper’s car.
I have made the point to my kids on numerous occasions that the implication of “nobody’s perfect” is that otherwise intelligent persons do dumb things from time to time. In fact, I have even presented human history itself as being more or less the story of what happens when people who know what to do, do something else. Clearly, I’m no more immune than anyone else.
Another thing that people know they should do, but often don’t, is diversify their holdings. Maybe it’s because they have “more important things to think about.” Maybe it’s because the current allocation has been doing quite well (thank you very much) and they are going to hang around to get some more.
Which, if you press them, they will admit, are not very good reasons.
Diversification is a key defensive step which we use to limit the possibility that a single, negative event gets a chance to do us too much damage.
But what’s less understood is the role that diversification plays in the compounding of earnings. When an investment makes money or gains value, that win doesn’t always get turned into new investment capital without some help from you. In other words, just because you got a return, doesn’t mean it got compounded.
And since compounding is the long-term growth engine, that matters.
When we take some of our winnings from investment A and use them to increase our holdings of B, C and D, then we have both protected those wins from exposure in the place where they were made, and put those dollars to work in pursuit of new wins in the future. It’s basically two sides of the same coin; despite the fact that the one side is about all you ever hear discussed.
When was the last time you rebalanced your portfolio? Is your current allocation mix anywhere close to what your plan calls for? Have you even thought about asset-class composition in the first place?
If you find yourself thinking that you would prefer not to have to answer any of those questions out loud, you know what you ought to do.
My lapse in doing what I knew to do cost me eighty-five bucks (you’re welcome South Dakota…). Your lapse could cost you a whole lot more than that.
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