When Warren Buffet declared himself “85% Benjamin Graham,” he was succinctly describing the value tenants by which he evaluates companies. While the late 20th century economist and investor had a different world to contend with than Buffet, his philosophy is shared between them. Unsurprisingly, indicators like demonstrated consistent earning power and low offering price are crucial to a Buffet-approved investment. A little more controversially is his use of return on equity as opposed to earnings per share to determine return on capital, the former being susceptible to distortion via leverage. However, for a man like Buffet where excessive debt is grounds for excluding a prospective investment, this hardly matters. Knowing his conservative philosophy, it’s likely he would only settle for guaranteed loans or equivalent relatively safe debt financing. Indeed, it’s hard to find anything all that controversial about his investment style apart from the over-arching debate between technical and fundamental analysis. So when a man like him declares, “Never invest in a business you cannot understand,” is it not worth at least investigating why?
Enter Bitcoin and all its crypto-cousins linking arms with Blockchain, the prettiest girl at the ball. In such a relatively short time, these two wondrous, sparkling technological phenomena have captured the hearts and minds of investors the world over. On Novermber 11th, Long Island Iced Tea Corp decided it would change its name to, “Long Blockchain Corp.” This alone caused its share price to soar 500% when it announced this on December 21st. I certainly can’t understand why this alone would warrant such an increase, so for the sake of discussion let’s assume this is the case universally. Given our mutual misunderstanding of investor sentiment, what could it be that rationally increased the value of this stock? If we look at the financials as Buffet would, debt to equity has not changed substantially overnight. In terms of management, there has been no significant overhaul. The bottom line certainly hasn’t changed and it’s unclear if any value has or ever will be added as a result of this change. Unless these investors have some significant insider knowledge, the price of this stock has increased essentially on the back of a press brief. To quote the NASDAQ release, “The discussions are only in the preliminary stages but indicate the areas of focus for the company.” In other words, investing right now is like giving a scalpel to a kid after they tell you they’d like to be a surgeon when they grow up. They aren’t there yet, and you don’t know when or if they will be.
Wherever you stand on the philosophy of investment, be you a technical analyst, another Buffet looking for purchases under calculated intrinsic value or someone who couldn’t care less, one thing is common. No matter how shiny something looks, or how much potential it may have. No matter how many people may think highly of you for investing in something new and innovative, don’t let hype earn your trust. Leave that to data.
For contribution enquiries, please email us.