Real World Investment Examples From Last Week’s Commentary Entitled “Respect Your Investments & The Process: Additional Useful Information”

Jason Hochstadt |

As contained within our 07/24/18 investment piece entitled, “Respect Your Investments & The Process,” among other things, we observed that (a) the stock market is incredibly risky over any given day, week, month or year; (b) stock market declines do occur and can be severe and (c) it is impossible to successfully and consistently time an investment in the stock market. With respect to the last point, a total of $1.8 trillion was pulled out of U.S. equity funds by retail investors from 2007 thru 2017 (every year saw outflows other than one, 2013, with very small inflows) – despite the fact that the stock market’s bull market is now the 2nd longest in history since March, 2009 (with above-average gains having been earned by the total stock market during this time).

Subsequent to our commentary from last week, a few examples of the above took place. Please note we have no opinion as to the investment or other merits (or lack thereof) of any company referenced below. These should serve as further reminders of the importance of diversification – both among companies, sectors, geographies and business types.

  • Facebook’s stock fell (19%) on 07/26/18, wiping out $119 billion in market value (its biggest percentage drop ever) and representing the largest dollar loss ever incurred by a publicly traded stock. Incredibly, their loss in market value was larger than 457 of the 500 S&P 500 companies (representing over 90% of the stocks in this Index), in addition to being more than the combined valuation of the bottom 20 companies in the S&P 500 Index!

    • The reason reported for such a decline was slower-than-expected revenue growth during the 2nd quarter and projected continued slower quarterly revenue growth. Mind you, Facebook’s Q2 revenue growth was over 42%; in fact, its (a) reported earnings per share was 2 cents above the consensus estimate, while (b) its revenue was 99% of expected and (c) its global daily active users was 98.7% of the consensus estimate. However, when stocks are priced with expectations that are extremely high, anything that is less than anticipated can cause a large decline in the stocks price.

      • As commented in an 07/26/18 WSJ article titled, “Facebook’s Terrible Timing and Why a Trade Deal Matters for Tech Stocks,” More generally, Facebook is also a reminder of what happens when tech companies priced for turbo-growth fail to live up to those targets.”

  • Twitter’s stock plunged over (27%) in 2 days, on 07/27 (by nearly 21% - a bear market in a single day) and then (8%) on 07/30. As in the case with Facebook, despite revenue climbing by 24% (and even posting its 3rd consecutive quarterly profit) Twitter’s decline in number of active users in Q2 ’18 (as well as expectations of continued losses in # of users) led to the stock route. The actual loss in monthly active users in the 2nd quarter relative to the 1st, 1 million, was only 0.3% of their total # of users – and was actually up nearly 3% from the year prior. Nevertheless, the market wasn’t happy.

    • As commented by an investment analyst regarding Twitter and Facebook, “It’s been a bloodbath this week for social media stocks. It really speaks to a lot more challenges from a growth perspective and a monetization perspective than Wall Street has been anticipating.”

    • Ironically, subsequent to the above “Several Wall Street firms are cautioning their clients about the prospects for Twitter shares, saying the social media company’s stock will not outperform until user growth returns.” So, after the fact, once the shares have plummeted, now a few major Wall Street firm analysts recommend avoiding Twitter and even putting an underperform rating on the shares (something not too common on Wall Street). Go figure?

  • Netflix’s stock has fallen roughly (13%) for the month of after missing its own forecasts by over a million subscribers in the 2nd quarter. They blamed their subscriber miss on “faulty internal forecasting.”

In line with the above, the NYSE “FANG”+ Index (yes, there is such an Index, consisting of Facebook, Amazon, Netflix and Google, among others) entered correction territory, having declined over (10%) in 6-weeks from mid-June to late July. These stocks have been scrutinized to an even greater degree than in the past given their disproportionate influence over various stock market indices (e.g. Facebook, Amazon, Apple, Netflix and Google went from comprising 6.2% of the S&P 500 Index in 2012, to more than doubling to a 12.6% aggregate weighting in the Index as of July of this year). Once again, diversification is critical because for every ‘hot’ stock there are usually a number of ‘not so hot’ stocks. For example, thru the end of last week, for example, the and SPDR S&P Homebuilders ETF and iShares U.S. Home Construction ETF were down (13%) and (12%) for the year-to-date, respectively, with the largest stock in the SPDR Fund, Mohawk Industries, down nearly (1/3) for the year-to-date.

Finally, in the category of “All that glitters isn’t necessarily gold,” the fraud case of Theranos is heating up – with the blood testing start-up that claimed it could perform various tests with a single drop of blood, once valued as much as $9 billion, now worthless due to an alleged complex fraud having been masterminded that duped investors (many well-known ones, including private equity firms) out of $700 million. And then there’s this – the share price of a non-traded REIT, American Finance Trust, which was sold in 2013, has suddenly seen a decline in value of $1 billion. Brokers sold this illiquid security for $25/share 5 years ago. On July 19th of this year, the company published an estimated value for its shares of $23.56. However, yesterday the security traded at $14.80 – over 41% less than what brokers sold it for and 37% less than the company’s independent board deemed it was worth last month. Why bother with the ‘allure’ of privately owned real estate when there are plenty of publicly traded investment vehicles offering exposure to all types of real estate at known market prices with daily liquidity? Understand what you own, why you own it and its purpose within your portfolio. Remember, no one cares as much about your hard-earned money as you do!

REMINDER: Past performance is not a predictor of future returns. Nothing contained herein shall be construed as the rendering of personalized investment advice or providing our opinion as to the merits of a particular investment or strategy.


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