“The hardest part is starting. Once you get that out of the way, you will find the rest of the journey much easier.”Simon Sinek
Investing in any public or private business consists of looking at it from two perspectives: Story and Numbers. The most common mistake which new as well as experienced investors make is overemphasizing either of these factors while ignoring the other.
Let’s take the example of Facebook. Facebook came up with IPO in May 2012. After listing in the mid-30s, the stock steadily declined and made an all-time low of ~$18 in August 2012. The story floating around in the market at that time was that the transition to mobile users will adversely affect display ads as the screen size in mobile is smaller. At that time the display ad on the sides of their web pages was the major source of the company’s revenues. Facebook had just started news feed advertising but the number of sponsored newsfeeds were kept low to avoid interfering with user experience. So, analysts were of the opinion as more and more users access Facebook from mobile rather than desktop, the monetization will suffer. This was getting reflected in their financial forecast and models.
In September, at a Techcrunch Disrupt conference, Mark Zuckerberg discussed how user engagement (time spent etc.) was much higher in mobile and they are going to make much more money on mobile compared to desktop. This proved to be an inflection point for the stock. As analysts and investors start getting a better understanding of the mobile story from management calls as well as Facebook’s execution/earnings result, the stock started recovering and gave investors extraordinary returns over the next several years.
The story alone is not always enough though. A company might have the best business and competitive advantage but if its valuations are too high to justify through the numbers even in the most optimistic case, the stock will eventually fall and underperform the market. Take for example the case of Cisco and Intel. Both are really good businesses and have done fairly well as a business in terms of increasing their revenues, profits and earnings per share over the last two decades from the year 2000 to the present. However, if you look at the market capitalization of over $500 bn they reached during the peak of the 2000-2001 dot com boom, they are still trading far below those levels. The reason is despite the growth story being really attractive, there were rarely any reasonable forecasting scenarios that would yield revenue and profit projections to justify that kind of valuation in 2000.
As a beginner or even for experienced investors, it is often tough to get both these factors right. We are addressing this pain point and trying to help investors better understand the fundamentals of their potential investment targets through our research shared on this website. We also offer a basic financial modelling and forecasting course on weekends for those interested in understanding how the analysis is actually done in the industry. You can check its detail here.
Investing isn’t that tough as it is sometimes made out to be and it has become a necessity in the new world. Fortunately, the availability of information has also increased and if you take a little more interest in improving your understanding, it can be a rewarding experience.