Facebook closed the week on a new low and the press is replete with tales of IPO investors’ woes, the demoralizing effect on employees and whether CEO Zuckerberg is in over his hoodie. Slate even featured a ridiculous article by a University of Washington professor advocating the nationalization of the company because it “has become a public good and an important social resource”. I wouldn’t know Philip Howard, the author, if I passed him on the street but if this article is any indication of how he and other professors of communication, information, and international studies think, we’d be wise to keep him and others of his ilk far, far away from the levers of power. Because he objects to Facebook’s privacy policies he advocates having a “national privacy commissioner with real authority, some stringent privacy standards set at the federal level, and programs for making good use of some of the socially valuable data mining that firms like Facebook do.” I’m pretty sure Orwell would recognize Mr. Howard. Apparently, he is unaware that Facebook is a voluntary activity.
Anyway, I bring this up because all the angst about Facebook has me thinking maybe now might be a good time to think about making an investment. I hasten to add that this is not an announcement that we’ve taken a position or that we are about to, just that the “bad” news surrounding the stock and a price half what IPO investors paid is at least a good reason to investigate the possibility. Investing is about buying low and you rarely find truly compelling investments in companies or markets that are in the midst of a run of good news. “Bad” news drives down prices and that is good for investors on the lookout for bargains. Does Facebook fit the bill? Well, even at half price, the shares are not exactly Graham and Dodd material but they do have a rather large pile of cash sitting around after the much maligned IPO. By the way, if you bought at the IPO price and are now sitting on a big loss, Facebook isn’t who you should be blaming. The person you find in the mirror every morning is the one who got you in this mess. Like Facebook’s service, buying the IPO was a voluntary activity.
I don’t know yet whether we will buy Facebook for our clients but the bigger lesson here is that if your investment process involves more than reading the headlines – and it really should – bad news can be a long term investor’s best friend. News, by the way, isn’t inherently good or bad; it’s just news and the only thing that makes it good or bad is your relative position. And in the case of Facebook, the “bad” news is mostly that the stock price is falling. The price of the stock has very little, if anything, to do with Facebook’s actual business but if you are long FB, a falling stock price is bad news indeed. For those of us who don’t own the stock, it might be good news depending on how the company performs in the future and whether we decide to buy part of the company. And that is another good lesson by the way; stocks are not lottery tickets. They represent ownership of a business and one would be wise to know what the heck one is buying – and how much one is paying – before lining up for IPO shares.
The press isn’t known – at least not often – for its deep thinkers and what you see in the headlines is most often only half the story. It is obviously bad news that the world is in the midst of a drought and food prices are rising but is there a silver lining to the lack of clouds? The unseen – or at least underreported – effect is a renewed debate about the merits of turning 40% of our corn crop into ethanol in an effort to satisfy the environmental lobby and buy farm votes, a twofer only available to politicians. If the drought forces the world to rethink biofuels policy, it might create more food security in the long run and that would obviously be good news. And oh by the way, a drought and high corn prices affect other businesses as well. We’ve already heard from Deere and I’d be willing to bet it won’t be long before we hear about some company whose hedging operation was actually an undercover speculating operation.
It is obviously bad news for the global economy that China is coming in for a hard landing, right? That is certainly the inference of all the headlines but is it really? Again, that depends on your point of view. If you have been long Chinese stocks it certainly isn’t good news but for the world as a whole, it might be one of the best bits of news we’ve seen in some time. China’s high rate of growth has come primarily from investments in infrastructure and housing that at least for now is looking like a waste of capital. If there is a finite amount of capital in the world at any given time, why would it be bad if China stopped wasting some of it? China’s desire to build things no one needs in pursuit of “growth” at any cost has destroyed capital not only in China but around the world where the demand for resources to feed the “growth” has driven capital into the ground. Investment in resource extraction to feed China’s artificial demand is capital that won’t get invested in more productive activities. If a hard landing in China means lower commodity prices around the world, an astute investor might be able to find a way to benefit from that trend. Maybe the most important good news to come from a hard landing in China is that it will quiet some of the fools who have been touting China’s economic model as superior to the free market brand.
What about Europe? Surely the bad news in Europe is really just bad news, right? Well, if you’ve read to this point, you know my answer is probably no. Europe is obviously in dire straits right now, but if you think out a little further than the next news cycle or the next quarterly performance report, what is going on there now may have far reaching and positive consequences for the long term. If there was ever any doubt that there is a limit to the Keynesian model of government spending as stimulus, Europe would appear to have finally driven a stake in the heart of that bit of voodoo economics. With no alternatives, Europe will finally be forced to address the underlying causes of their economic crisis. The socialists will fight down to the last sou but the battle has been lost and supply side reforms will eventually be seen as the only way out. Taxes and spending will be cut and deregulation will allow a more entrepreneurial class to emerge from the depths of massive youth unemployment. It won’t be quick and it won’t be easy, but it will come. In the meantime, Europe’s markets are cheap – although not as cheap as they were just a few weeks ago – and bargain hunters should be sifting through the detritus.
The daily news flow should be viewed by investors as valuable information about economies and markets but you have to look and think past the headlines. Long term investors need to look through the present and determine whether a brighter future is possible. One needs to think about how the current analysis might be wrong and if there are beneficiaries of current “bad” news. Of course, price and timing matter so you can’t just friend anything with a series of bad headlines. Including, by the way, Facebook.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: firstname.lastname@example.org or 786-249-3773.
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