Previously I suggested that for a variety of reasons many valuations seem skewed by traditional standards and promised examples illustrating my point. The value of just about anything marketable is usually a combination of objective as well as subjective considerations. Ask anyone having sold their business and they may tell you how many different approaches to determining an asking price there are. Eventually, they just have to subjectively choose one.
One more comment before providing some examples of the “new realities” for the investor. I have intentionally selected investable ideas I consider legitimate. Their commonality is the quandaries each represents.
Let’s start with Tesla. One of my basic tenets is to know what I own. Is Tesla an auto manufacturer, a battery maker, a space rocket maker, or a high-speed train company? Some would say “Who cares?”, but remember, the topic at hand is valuation. If one can’t define what something is, how can one determine a reasonable price to pay for it?
Next let’s consider the energy sector, virtually a proxy for oil. All alternative energy sources combined pale in comparison to oil’s being the predominant lifeblood of global commerce. But “Big Oil” is probably THE poster child in representing the antithesis of what is currently referred to as Environmental, Social, and Governance (ESG) investing. Oil companies may be profitable for years and even decades to come, but will their waning appeal diminish or destroy investor appetite? In other words, can their share prices ever be cheap enough for investor consideration?
When it comes to an “elephant in the room” of a valuation discussion, commercial real estate can’t be overlooked. And before attributing this dilemma entirely to the pandemic-compelled working from home, one has to recall that retail was already being supplanted by online shopping. When things get “normal”, will “normal” look like 2019, or did we get to an inevitable future quicker than expected, where shopping centers, strip malls, and office space are no longer needed? Or, will they all be converted to distribution centers? How should one price commercial real estate these days?
Finally, speaking of real estate, will cloud-based algorithmic ledger currencies (Ever heard of Bitcoin?) eliminate banking altogether, let alone make bank buildings obsolete? For that matter, aren’t bank buildings already difficult to justify in the cashless environment that already exists? Not only does the bank stock investor need to consider potentially redundant real estate, but traditional banking itself may also be supplanted altogether by the advent of blockchain.
Valuation discussions have always been fascinating to me and I have always known that the value of anything at any given moment is precisely what a willing buyer and seller agree to; no more, no less. But if the buyer/investor is careful at what they pay and predetermine how long they are willing to wait (per their Financial Plan), I believe they can mitigate disappointment.
Any opinions are those of Steven Gideon and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
New Realities–Part 2
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Previously I suggested that for a variety of reasons many valuations seem skewed by traditional standards and promised examples illustrating my point. The value of just about anything marketable is usually a combination of objective as well as subjective considerations. Ask anyone having sold their business and they may tell you how many different approaches to determining an asking price there are. Eventually, they just have to subjectively choose one.
One more comment before providing some examples of the “new realities” for the investor. I have intentionally selected investable ideas I consider legitimate. Their commonality is the quandaries each represents.
Let’s start with Tesla. One of my basic tenets is to know what I own. Is Tesla an auto manufacturer, a battery maker, a space rocket maker, or a high-speed train company? Some would say “Who cares?”, but remember, the topic at hand is valuation. If one can’t define what something is, how can one determine a reasonable price to pay for it?
Next let’s consider the energy sector, virtually a proxy for oil. All alternative energy sources combined pale in comparison to oil’s being the predominant lifeblood of global commerce. But “Big Oil” is probably THE poster child in representing the antithesis of what is currently referred to as Environmental, Social, and Governance (ESG) investing. Oil companies may be profitable for years and even decades to come, but will their waning appeal diminish or destroy investor appetite? In other words, can their share prices ever be cheap enough for investor consideration?
When it comes to an “elephant in the room” of a valuation discussion, commercial real estate can’t be overlooked. And before attributing this dilemma entirely to the pandemic-compelled working from home, one has to recall that retail was already being supplanted by online shopping. When things get “normal”, will “normal” look like 2019, or did we get to an inevitable future quicker than expected, where shopping centers, strip malls, and office space are no longer needed? Or, will they all be converted to distribution centers? How should one price commercial real estate these days?
Finally, speaking of real estate, will cloud-based algorithmic ledger currencies (Ever heard of Bitcoin?) eliminate banking altogether, let alone make bank buildings obsolete? For that matter, aren’t bank buildings already difficult to justify in the cashless environment that already exists? Not only does the bank stock investor need to consider potentially redundant real estate, but traditional banking itself may also be supplanted altogether by the advent of blockchain.
Valuation discussions have always been fascinating to me and I have always known that the value of anything at any given moment is precisely what a willing buyer and seller agree to; no more, no less. But if the buyer/investor is careful at what they pay and predetermine how long they are willing to wait (per their Financial Plan), I believe they can mitigate disappointment.
Any opinions are those of Steven Gideon and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.