Years ago I was in the Sahara desert looking down at the ground, and I noticed some pebbles rolling. I picked them up, and low and behold they seemed to be a different color than the others. The wind was kicking up some dust around me, and my guide was yelling something, but I pulled out my microscope and examined them more closely.
People started yelling, but doggone it, I was going to inspect these small stones, as I felt the wind kicking up around me. My guide could take it no more and shook me, tilted my head towards the horizon, where a dark cloud blotting out the sun spelled bad news.
No, it wasn’t rain, it was a sandstorm, and moments later I was pulverized by tiny pieces of shrapnel propelled by the strong wind, til I was left with sand pouring out of every piece of clothing and running off every body part, it was as if you had dug up a genie directly from the sand, no lamp.
The Investing Story
Oftentimes I believe we examine minutia, the earnings, revenue, and margins after the dust has already settled rather than looking the bigger picture, what’s coming on the horizon.
People question me about earnings, about revenues, about analyzing margins, and telling me this is what investing is about. I disagree, I think it is a combination of looking at the horizon, and anticipating the road ahead, as well as analyzing the sands at your feet. (the numbers)
In the Sahara, the sands shift all the time. So do accounting practices. Earnings on often Wall Street are manipulated garbage. Look at mark to market (how a bank reports assets on its balance sheet) on the balance books of big banks. To quote Goldman Sachs Group, Inc. (NYSE:GS) description of the now defunct Lehman Brothers, “mark to fiction.”
In order to read the sands accurately, you have to be a very good accountant and read a lot of disclosures. This is what Jamie Dimon at JPMorgan Chase & Co. (NYSE:JPM) and all sorts of banks, and institutional investors hire an army of MBA’s to do. In his book, “Too Big To Fail” Andrew Ross Sorkin describes the army of bankers who inspected the books of the financial institutions going under, including descriptions of all the financial chicanery used to cook the books. (specifically AIG)
Besides which you are examining the sands long after they have already settled. That doesn’t mean it’s not important to do so. As a “horizon investor” I have to see whether vision was blurred.
For example, if I see l lines outside the Apple Inc. (NASDAQ:AAPL) store lining up to buy the iPad, or iPhone when they came out, when people make fun of me for being a fuddy-duddy using a PC, looking ahead, I should see a really bright sun descending over the valley of Apple.
Now, it’s up to me to do my due diligence, because when the sales figures come out, and they are up, and profits are up, then that means my vision of the horizon wasn’t blurred. The challenge in waiting for the earnings before making your decision is that the market has already responded to the good or bad news, and this will be priced into the stock. The further you can look out at the horizon and predict whether it’s going to be a sandstorm or sunny the greater your returns will be, but the further ahead you look, the more hazy your vision. Tell me what Apple will look like ten years from now?
Sunny
Facebook Inc (NASDAQ:FB)– the stock has a much higher price to earnings ratio compared to the average stock. Does this make it a sell? Some people are worried about where the magical revenue stream will come from. I look at the horizon, and see the US government and states in need of cash, citizens still spending their money overseas on gambling and realize that, eventually, the US will legalize internet gambling in some form.
Now, Facebook surprised me by putting Bingo and slots on its British version of the site. (I didn’t believe it fit into Zuck’s ethos) It’s a no brainer that they would do the same in the US. They have a Billion users, poker is a social game, bam, Huge potential revenue stream. I say the outlook is blindingly sunny in addition all their other tinkering with generating revenue from the site.
Sandstorm
Research In Motion Ltd (NASDAQ:BBRY) Blackberry
– I have met too many people who waited for the iPhone 5 to come out, and intentionally waited for it to dump their Blackberry, which none of them described their old phone in nice terms. The “stickiness” of a platform’s OS with all the apps you have downloaded means that you have a switching cost of some kind, even if just a pain in the butt. I think Blackberry is too late to the party.
Additionally, the fact that voice dictation for emails and texts has gotten so good means the keyboard is almost for luddites (or people in crowded offices) Horizon: Sandy
Am I Right?
Time will tell; but I assure you, looking at revenues and analyzing margins won’t account for what I wrote above, and therefore I find someone who can give me insight on the horizon more valuable than crunching numbers.
I tried to convince a family member not to buy a house in 2006. “They are giving 500k, no money loans down to truckers making 35k a year. How is that sustainable?” Yet if you analyzed bank earnings, they were off the charts, with their mark to fiction accounting, etc.
One simple, accurate look at the horizon would tell you a major sandstorm was coming. People were blinded by the “diamonds” at their feet.
Where Number Crunchers Prevail
Amazon.com, Inc. (NASDAQ:AMZN) stock. Look at the lofty valuation and low margins it has. A moat, definitely, and I love using their service, and it has become a regular part of my life. But you cannot look only at the sunny horizon I believe the company has, because if the stock is not of good value you can’t buy.
I honestly don’t understand it, the accounting, how to value the company, and that’s why when places like the Motley Fool are willing to sell info on it, so that I can understand why it might not be as pricey as I thought, I might be willing to buy.
In the Meantime
I really think as an individual investor, your time is better spent looking at the horizon. The accounting sands are really hard to read. If you’re going up against the MBA number crunchers (sand readers) at JP Morgan you’re at a disadvantage. Look ahead rather than down. You’re much less likely to be buried in the sands if you can see the storm approaching.
The article Getting Buried In The Coming Sandstorm- Not So Good originally appeared on Fool.com and is written by Margie Nemcick-Cruz.
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