Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 51

One day, you’ll be glad you feel old and tired

During the last week, some very smart investors have been writing about Facebook’s acquisition for AUD21 billion of an app that, up until the announcement, I hadn't heard of. One successful fund manager wrote, “Clever people are doing things I don't understand and I am just feeling old and tired.”

The comment reminded me of those made by Warren Buffett in 1969 who, after the heady go-go days of the bull market, shut his private partnerships and handed all the funds (and Berkshire stock) back to investors, saying:

“The investing environment … has generally become more negative and frustrating as time has passed. Maybe I am merely suffering from a lack of mental flexibility … Quite frankly, I just don’t see anything available that gives any reasonable hope of delivering such a good year and I have no desire to grope around, hoping to “get lucky” with other people’s money. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”

One observer commenting on security analysts over 40 stated, “They know too many things that are no longer true”.

What's happening?

Something is up. Money is cheap and there’s oodles of it that has to find a home.  Arguably, there’s even more looking for a shrinking universe of safe harbours as it flees the emerging markets.

Coincidently, local commentators are excited that Joe Hockey has, apparently single-handedly, aligned the G20’s leaders to ‘go for growth’, and then suggested it will translate into further gains for the stock market.

Ashley Owen's articles in Cuffelinks (linked here) support Warren Buffett’s research that there is no relationship between economic growth rates and stock market performance. It is interest rates and corporate profits as a percentage of GDP that drive longer-term returns.

In this environment, it comes as no surprise that you have Facebook buying WhatsApp for more than the international debt of Sri Lanka, Tunisia, Cuba, Ecuador and a litany of other countries.

And you have Xero, the New Zealand cloud-based accounting software provider trading on a market capitalisation of $4.6 billion, even though it is yet to turn a dollar of profit from it 250,000 customers.

You might remember the tech boom of the late 1990s which peaked just as earnings multiples and book values had finally succumbed to new valuation metrics that relied on clicks and users, with little thought paid to how this traffic would be monetised.

Facebook has paid AUD46.70 for every one of the 450 million monthly WhatsApp users who send each other text messages, photos and videos via the internet, bypassing the costly mobile phone networks. You have to wonder how you are going to extract money from those who can’t afford to pay or don’t want to pay to send a text message on a mobile phone network.

Xero is trading on an eye-watering market-cap of $18,400 per user. According to Xero’s website, the most popular package is $720 per year. The annual revenue run rate might be $180 million if everyone was subscribing to the most popular package. The company is trading at 26 times revenue and there’s no profit as of yet.

Bricks versus clicks

You don’t need to be old and tired to realise that unlike the gold rush of the 1800s, online real estate is not in short supply. It is abundant and probably infinite and even if you secure the competitive advantages associated with the network effect by being a first-comer, online customers can still prove to be disloyal and fickle. And switching costs are low, as my team demonstrated recently by changing back to MYOB from Xero without a hitch.

Despite this, Xero’s market capitalisation is about the same as Flight Centre or Bendigo and Adelaide Bank, whose 2013 profits were $269 million and $359 million respectively. Xero’s market cap is higher than TPG, Platinum Asset Management, Boral and Tatts Group.

There have been some spectacular failures over the years in the internet space and I am not suggesting that Xero or WhatsApp will join the list. However, you do need to think about investing to the slow and gentle chime of an old grandfather clock, not to the rapid and almost hyperactive beeps of a Formula 1 team’s stopwatch.

It seems the pendulum is still swinging towards the cheap and easy money, and the delight of big deal-making will spur investment bankers to encourage others to do deals. These, in turn, will draw a crowd and prices will move ahead.

As I have said here previously, we haven’t seen the bubble yet but the seeds are germinating nicely.

When the investment pendulum swings back however, just as surely as it does on the grandfather clock, heady takeover premiums will give way to big write-downs and investors who savoured the best of the party will carry the worst of the hangovers. Then the previously old and tired might gain a bit of a spring in their step.

 

Roger Montgomery is the founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able

 


 

Leave a Comment:

RELATED ARTICLES

It's the middle of reporting season: what's really happening?

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Welcome to Firstlinks Edition 602 with weekend update

Markets are undergoing a mini-crash and there’s a whiff of fear in the air. The challenge for investors is emotional rather than intellectual, and here are three rules to ensure that your portfolio remains on track.

  • 13 March 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.