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The ‘smoke and mirrors’ deceit: Speculators’ obsession with ‘instant everything’ drives tech shares to ridiculous valuations

20 September 2020 Gareth Stokes

I spent this morning watching a handful of investment videos on YouTube, dipping in and out of what some of the financial market gurus have to say about the US markets. There were plenty of thought-provoking snippets, with my favourite being an independent assessment of the world’s all-time greatest investor’s view on gold. The clip was shared by none other than Robert Kiyosaki, an American businessman and author of Rich Dad Poor Dad. He noted that Warren Buffett, a long-time critic of gold as, had completed a major acquisition in Barrick Gold. Berkshire Hathaway recently acquired 20.9 million shares in the mining company for north of US$500 million.

Treating gold with disdain

Buffett is frequently credited with the following gold snub: “Gold gets dug out of the ground in Africa… Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility; anyone watching from Mars would be scratching their head”. This quote presents an opening for the ‘smoke and mirrors’ tagline used in our article headline. The phrase is explained in Wikipedia.org as “a classic technique in magical illusions that makes an entity appear to hover in open space… In everyday English it refers to any proposal that, when examined closely, proves to be an illusion”. 

Writers frequently trawl the internet for quotes, preferably by a subject guru, to back up our article; but we cannot always be sure of the quote’s origins. We found enough online references to tie the preceding statement to Buffett; but there are plenty of examples were writers blur the lines to lend credibility to their point of view. Perhaps the best example of this abuse is the repeated attribution of the quote “compound interest is the eighth wonder of the world” to Albert Einstein. Writers love creating the link between Einstein and his physics-redefining theories and the power of compound interest. On closer examination the reader will learn that Einstein has no claim to the quote. But we digress… 

Kiyosaki has unwittingly pulled a ‘smoke and mirrors’ trick on his audience by assuming that Berkshire Hathaway, accepted by most investment analysts as Buffett’s corporate alter ego, only makes investment decisions on Buffett’s instruction. In ‘The truth about Warren Buffett’s investment in gold’, published on Forbes.com, Rob Berger notes that “a large part of [Berkshire’s] portfolio [has been handed] over to two investment managers, Ted Weschler and Todd Combs”. He further opined that purchasing shares in a mining company like Barrick was far removed from an investment in physical gold. A listed company offers many things that physical gold cannot, including hard assets and the ability to pay dividends. The firm also mines copper in addition to gold. 

The depravity of zombie investors

Our reflections on the ‘smoke and mirrors’ concept offer an excellent transition into the debate around the valuation madness that presently exhibits on the technology-heavy NASDAQ and other indices in the United States. We will focus on three examples that, in our view, illustrate the depravity that today’s zombie investors exhibit. 

The first and most recent is the listing of Snowflake on the New York Stock Exchange. The firm more than doubled its $120 IPO target on its first trading day. Investors have stuck a US$70 billion valuation on a firm that bills itself: “A data platform that harnesses the immense power of the cloud”. Our hope for the overzealous speculators buying the shares at these levels is that the immense power of the cloud shelters their precious Snowflake from the even greater power of the sun. The more sensible among us will sidestep the hype by buying into the Financial Time’s view. Opinion writer Richard Waters offered in his appropriately titled ‘Snowflake’s skyrocketing IPO has echoes of the dotcom boom’, that the market valuation was “head-scratching”. 

Our second ‘smoke and mirrors’ diatribe centres on the recent decision by General Motors to take a $2 billion stake in electric vehicle maker Nikola Corp. There are some who might argue that Nikola should not even describe itself with the phrase ‘vehicle maker’, because soon after the deal was announced, a short-seller, Hindenburg Research, published a number of damning allegations against the firm, including that the truck prototype it used to secure early investments was little more than a prop. Subsequent reports into the saga suggest that GM is unphased. In true ‘big corporate’ fashion they have simply shrugged off their overpayment for a small stake in a shaky tech start-up on the basis they will eventually recoup the money. What, we wonder, will shareholders think if the shaky tech start-up goes to the wall? Will GM end up like Softbank, which pumped billions of dollars into another ‘smoke and mirrors’ ruse, WeWork, in an ongoing attempt to save face? 

Meteoric rise on the rich list

We end today’s discussion with every zombie investor’s favour tech stock, Tesla. South Africans have an affinity for the electric car manufacturer due to Elon Musk, its entrepreneur founder, hailing from here. Musk has Tesla’s meteoric share price rise to thank for his own promotion on the Forbes.com ‘richest in the world’ list. He is battling with the likes of Ambani (Reliance Industries); Buffett (Berkshire Hathaway); Ellison (Oracle); and Zuckerberg (Facebook) for the third rung of this prestigious list. And if the Tesla crazies have their way, driven into a frenzy by the magic of ‘battery day’, he may even have the slimmest chance to catch Gates (Microsoft) who is some US$30 billion ahead of him in second place. This rich list is a bit of a rollercoaster nowadays as market volatility can add or subtract billions from any of the abovementioned fortunes in a single day. 

At its current price of some US$430 per share Tesla has a forward price-to-earnings (PE) ratio, based on earnings forecasts for 2020, of 557 times. This means an investor is prepared to pay 557 times this year’s predicted earnings for each share. JSE-listed favourite, Naspers, by comparison, trades on a PE ratio of only 25,82 times. We are sure throngs of serious investors will join us in asking: What can Tesla possibly announce on its 22 September ‘battery day’ that could justify its current valuation? Or is battery day simply one of countless ‘smoke and mirror’ mechanisms being used by Musk and his fellow executives to keep speculators interested and chase the share price ever higher. The billionaire entrepreneur does not earn a salary from Tesla, opting instead for a staggering bonus structure linked to the firm’s share price. 

‘Instant everything’ drives crazy valuations

The current valuation madness suggests that our instant everything mindset has infected financial markets. Investors, or should we rather call them out for the speculators they are, assign values to technology stocks by discounting their uncertain earning streams to infinity. They will eventually pay dearly for these acts of blind faith.

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