Friday, November 4, 2011

The New Dot Com Bubble - and How the Media Reports it.

Why do people buy houses and lose money, buy gold and lose money, and buy dot com stocks and lose money?  Because People are idiots, that's why.  Don't be an idiot!

Groupon finally did an IPO, selling off a tiny 5% of the company for $700 million.  At that price, the company is "worth" $13 Billion.  Really?  Coupons for cheap pizza slices are worth that much?

Bear in mind that GM has a market cap of only $36 Billion, and you can see that Groupon is wildly over-valued.

And by selling off only 5% of the stock - what is the point in that?  Shareholders will never, ever have any real control over the company.  They are in the driver's seat, and you have no say in how the company is run.

And since the company is hemmoraging cash, don't ever expect it to pay a dividend. 

Oh, yea, there is the problem that the business model is readily copied and in fact, other folks are copying it as we speak.

And then there is the problem of the fact that the whole thing is a fad that is already fading - fast.

This article on MSNBC mentions these problemsBut read the article carefully.  No where does it day "Hey, this is a really shitty deal!  Groupon Stock is the worst investment in the world!  Run away from this stinking turkey!"

Rather, you have to read the article carefully and look at the "criticisms" of the company (from "outsiders" - whatever that means) and ponder them, and then look at the arguments made by the CEOs who are cashing out in the deal and realize how specious they are.

News outlets, in a bid to be "fair" never come right out and say what should be readily obvious.  During the housing boom, they used similar wishy-washy language to say, in effect, "Anyone who is paying $500,000 today for a condo that was selling for $150,000 three years ago is an idiot who will be bankrupt in three years."  It was all there for you to read, but you had to know how to read-between-the-lines.

When the Chairman of the Fed warns against "froth" in the housing market, back in 2005, you have to pay attention - even if the guy building and selling houses says "Nah, he's wrong!"

Say, you don't suppose those people who were making money in the housing industry were lying to us, just to make another sale, do you?  Nah!  Builders and Real Estate Agents have higher ethical standards than that.  In Bizarro World, maybe.

Will Groupon blow up?  Is the Pope Catholic?  Can a company that hands out discount coupons for cookies be worth 1/3 the value of the worlds second-largest automaker?    Nearly twice the market cap of Sprint?  I doubt it.  GM is actually making money, Groupon is not.  And making money is the deal, in business.

And others will follow suit - if they cannot make sustainable profits.  Sites like Linked-In, Facebook, Twitter, and the like, are destined to fail, unless they can show a profit.  You can't run a site based on investors continually plowing money into it.  And sites can be copied easily.  And if they are a fad - and most of them are a fad - then there is no there, there.

But of course, I am sure the guy selling the stock has a different perspective.

But ask yourself this.  If it was such a really good deal, (a) why isn't it making money, and (b) why would they sell stock, instead of keeping it all for themselves?

And the answer to the second question is simple:  Because there are tons of chumps out there who confuse flash and noise with real substance, and think that just because something is mentioned in the news a lot, it must be a good deal.

No really, people think like that - and invest like that.

Don't be one of them.