Saturday, September 28, 2013

Mind of a FB Buyer

The stock market is a schizophrenic animal.  Facebook is the poster child for the wishy washy nature of stocks.   It has confounded my logic for what is clearly a junk business model.  A company that makes money from advertising when no one clicks on their ads.  Wall Street agreed with my point of view for 14 months, until that magical, mythical earnings report in July.  Beating low expectations set off the ignition switch.  From then on, I knew it was suicide to short FB.  In January, it was NFLX putting on the biggest earning short squeeze I have ever witnessed in my career, springing its path toward 300.  In May, it was TSLA having its ignition turned on after blowing out earnings,  supercharging the stock to permanent parabola status.

The continuing disappointment in AAPL has left a huge void.  First NFLX, then TSLA, and now FB are filling in the niche of growth stock darling.  It takes multiple growth names to fill up the void left by such a large cap name as AAPL.  What I find fascinating is the eternal love of AAPL.  It is the Peter Lynch model for investing gone wrong, buying a stock because it makes a lot of money and its  products are used everywhere.  It works on the way up but after a stock like that peaks out, the downslope is treacherous.

When I first started trading stocks, I would look at balance sheets, income statements, P/E ratios, Price to book, price to revenues, and all the other things called fundamentals.  But I soon realized that the market could care less about those things.  The market would reward growth beyond anything, as if everything else was trivial.

That is when I noticed that the people moving stock prices are proactive, not reactionary.  The difference between a momentum investor and a value investor is this:  Momentum investors take a proactive approach to investing (momentum), buying when he sees growth, and prices rising, regardless of valuation.  Momentum investors are the buyers on the way up.  Momentum investors are the ones hitting bids and lifting offers.  That is what moves stock prices, not limit buy orders set below the market.

Value investors need to wait for the prices to come down to meet their value criteria, reacting to a lower price, which means they are buying on the way down, after the earnings have already expanded, and started to flatten out, after the story has gotten old.  The stock market is not like shopping, things that go on sale aren't necessarily a good thing.

 Stocks are about hitting the three bagger, the five bagger, finding the next MSFT.  That can only happen if you have a stock that leaves room for the imagination, crazy future projections of current growth rates, a buzz about it. That is why you had the biotech boom, then the dotcom boom, and now this.  Stocks like FB and TSLA have never been about the fundamentals, but a ticket to dream of hitting it big in the stock market.  Even in such a benign stock market environment, there is little growth in the economy, so you have very few stocks that can capture the imagination of investors with big growth rates.  FB and TSLA have now become the two biggest icons of this exclusive group.

Eventually these bubbles will come crashing down, but that is a 2014 story.  Bubbles thrive at the end of a good stock market year.   Ala 1998 and 1999.  So party on until the calendar turns to January.


Retta Matson said...

What’s making stock market to be known as a schizophrenic animal? How this term relates to the FB Buyers?

Market Owl said...

Stock market is always a bit schizophrenic. Fear and greed are the main drivers of stock prices, because it is hard to value the true fundamental worth of a company's future cash flows.

Obviously, FB buyers are very optimistic on the growth of future cash flows because the stock is priced at a very high P/E ratio.

John Smith said...

Thank you for such wonderful and interesting article about FB Ignition.

John Smith said...

Thank you for sharing such interesting and informative article.

FB Ignition