The feeling that the old and young among us operate in different universes is nothing new, especially when it comes to matters of finance. It was Oscar Wilde who first said, “The trouble with young people today is that they know the price of everything and the value of nothing,” and Aristotle who observed that “Youth loves honor and victory more than money.” These quotes came to mind this week as I digested the news that the owners of Snapchat had turned down a reported $3 Billion offer for their business from Facebook (FB). The nagging feeling of unease that this produced was then amplified by yesterday’s release of the holdings of two well-known investors.
The headline takeaways from the filings of fund companies that I watched scrolling across my TV screen this morning suggested that, while the young are chasing power and glory through increasingly esoteric social media platforms, the old are reverting to more traditional companies. The reports highlight two big investments by George Soros and Warren Buffett; the Soros fund has taken a large position in Microsoft (MSFT) and it appears that Buffett is keen on Exxon Mobil (XOM).
It seems to me that there are two parallel economies here. In one world, it is deemed reasonable that Twitter (TWTR), a company that has yet to turn a profit, warrants a valuation around $40 Billion. In this world $3 Billion for another non-profitable venture can be turned down. The object, it would seem is not to fulfill the dream of most who start a business and cash out spectacularly, rather it is to dominate at some point in the future.
In the parallel universe, meanwhile, old-fashioned values still prevail. Durability is valued over popularity and profit is valued over potential. How dreadfully boring!
Boring it may be, but it could also be a warning to the rest of us. Neither Soros nor Buffett are averse to taking risks per se, but as the Sage of Omaha once famously said, we should be greedy when others are fearful and fearful when they are greedy. The Soros Fund and Berkshire Hathaway (BRKA/BRKB) shifting money to MSFT and XOM suggests that these two well-respected investors smell a little greed.
The case for believing (and investing) in each new trendy tech and social media startup is, however, strong. You can afford to get some of these calls wrong, as long as you get at least one right. An early purchase of Google (GOOG), for example would have paid for a lot of mistakes and Facebook (FB) and LinkedIn (LNKD) have turned out to be decent investments. The difference, of course, as I have pointed out before, is that all three of these were profitable at the time of their IPOs.
This willingness of the markets to throw money at unprofitable companies is worrying in and of itself, but it is the underlying message of the Snapchat non-deal that is most worrying. The very rise of Snapchat is indicative of the problems that social media companies have to overcome, and the refusal of the founders to sell indicates that some of the old solutions will no longer work.
The problem is simple; social media is inherently trendy, and the future is dependent on the will of a group not known for their loyalty to a brand or idea…teenagers and pre-teens. Here I go again, sounding like “Get off my lawn” guy, but the fact that the friends and classmates of my 10- and 11- year-old kids all use Snapchat, but rarely have a Facebook account shows how fleeting success in this area can be.
Before this week’s news, I, like most people, had assumed that the pattern would be the same as in other sectors and follow the well worn path taken by Google. Once established, simply overwhelm any potential competitor with cash and buy them out. This works when the owners and founders of the threat have old people motivations like making as much money as possible but when they are looking for “…honor and victory…” it doesn’t pan out so well.
I have been guilty in the past when considering social media stocks of concentrating on the small problems, such as how do they monetize popularity, and what technology is around the corner that will enable them to find out even more saleable information about their users. I have, it now seems, missed the big picture. You can accuse Buffett and Soros of being old fashioned and out of touch all you want, but their retreat to solid, unexciting dividend paying stocks worries me.
The thing about bubbles is that they seem rational to most at the time and look like they are never going to end. If one listens closely, however, you can often hear a young boy shouting, or in this case an old man muttering, that the Emperor is scantily clad at least. The overvaluing of a pre-teen fad and the caution of the old and wise has me convinced that there is a bubble and it is close to popping. When it does, the fallout could be messy so I will endure the comments of those who say that I am old and that I just don’t understand while I follow the lead of investors with a proven record, and move to a more defensive portfolio.