Valtrend

Buyer/Investor Beware: JOBS Act

Pete — Fri, 17 May 2013 22:46:40 +0000

Start-up, private companies are beginning to offer shares to the investing/consuming public as part of the JOBS Act. JOBS stands for “Jumpstart our Business Startups”. It might do that, of course – for a few select companies. It also might leave a lot of uninformed investors feeling burned.

How much do these companies raise and at what price? How much of their company will be sold? Are the business owners prepared for minority investors?

These are all very interesting financial and valuation related questions. Will the business owners and the investing public just “wing-it” or get professional help? We will have to wait and see.

Financial Analyst – Key word: Analyst

Pete — Tue, 07 May 2013 22:12:52 +0000

An analogy is a comparison between two things. Analogies have unlocked mysteries in science. Just ask Einstein, Newton and Heisenberg to name a few.

Appraisers who do not use empirical data (read: total beta) to select a company-specific risk premium in the discount rate for their privately-held company have no such comparison. In short, they guess. They might tell you it is an educated guess, but nonetheless, it is a guess. They are in the dark.

On the other hand, appraisers can use data of guideline public traded companies to make comparisons. Some of the comparisons may be a stretch, but at least they are not operating in the dark. To quote Erasmus, “In the land of the blind, the one-eyed man is King”.

Equal weight v. Market weight

Pete — Tue, 30 Apr 2013 19:02:59 +0000

As in most choices, there are plusses and minuses to an index creation. Apple represents about 3% of the S&P 500 as a market-cap weighted index. If, however, the S&P 500 Index was an equally-weighted index it would only represent 0.2%. Big difference. Apple would no longer “drive” the index, reducing one’s exposure to large cap stocks.

The equally-weighted index would, however, be subject to the volatility of smaller cap stocks. Either approach – in different times – would outperform the other, of course. From a practical perspective, however, the fees related to the equally-weighted indices have been greater than market cap weighted indices. Fund managers must constantly monitor and rebalance the fund to keep the equal weighting, which seems to tilt in favor of market-cap weighted indices.

401K: How much is too much?

Pete — Wed, 24 Apr 2013 15:21:22 +0000

President Obama’s 2014 budget proposes a cap on what Americans can save – in their collective 401Ks. The White House believes that some have accumulated more than what they will need. Thus, the President desires to limit someone’s retirement amount (to about $3 million in 2013) or what would fund an annuity of about $205,000/year. Other than another step towards socialism, I wonder how the President knows. How does he know the maximum need of every single American in retirement? Seems like another bureaucratic nightmare to collect more taxes.

Rally in Small Cap Stocks: Too Much of a Good Thing?

Pete — Sat, 20 Apr 2013 13:23:38 +0000

Small cap stocks have performed well in 2013, just as they have since the market bottom in March 2009. In fact, they have nearly tripled in four years. It is a “risk-on” environment. Thus, it may be time to take some risk off the table and invest in larger cap stocks, which have (generally) underperformed their “little brother”.

Apple v. Google: A Change in Fortunes

Pete — Thu, 11 Apr 2013 13:24:16 +0000

AAPL’s stock has not performed well lately. GOOG’s, on the other hand, has. Bottom line, it is tough coming up with the next, newest and greatest thing in consumer electronics – particularly when your profits are already north of $45 billion annually. GOOG just may have a better and more stable business model, concentrating on services such as advertising.

Complacency: The “Only” Thing to Fear

Pete — Thu, 11 Apr 2013 13:17:19 +0000

The stock market is at or near all-time highs….and the march upward has been quite steady. The VIX (a measure of expected volatility) is near lows back in 2006 – 2007. I do not remember 2008 and 2009 being so pretty. If everyone expects the climb to continue, it may be time to take chips off the table.

No fear should bring a wall of worry

Pete — Fri, 29 Mar 2013 22:00:37 +0000

Stock markets are at or near all-time highs. Hurrah, for now. The VIX – or fear/volatility index – is also at or near lows not seen since 2007. Remember late 2008? Has the market forgot?

Or are we at all-time highs because it could have been so much worse? After all, we somehow dodged the (for the most part) the fiscal cliff; Europe is better-off than last year; and China is accelerating again, etc.

Apparently the only thing to fear in the stock market is the (lack of) fear itself – which is a problem.

First to File: Change in Patent Law

Pete — Thu, 21 Mar 2013 10:07:29 +0000

This last week there was a mad dash to file patents. Why? A change in the law. First to file now rules the land, instead of first to invent. Who benefits? Large companies who have more money to pay for the process. Who loses? The independent inventor, without big pockets, who might need to better assess the commercial application of the potential patent.

The hurdle to obtain a patent also became more difficult with the change in law. “Prior Art” just expanded to include foreign patent applications published in other languages than English. These changes created a flood of new applications just prior to the change in law on March 16th. Change is generally good, but I wonder if some of this new law got it wrong?

Pre-IPO Studies

Pete — Fri, 15 Mar 2013 21:29:06 +0000

I have mentioned this before but when a company is private, it is generally being priced for lack of diversification (i.e., idiosyncratic risk matters). When it is public, idiosyncratic risk no longer matters. None of the pre-IPO studies seem to account for this or even mention the potential for an apples-oranges comparison.