Wednesday, January 21, 2015

IBM Should Buy Blackberry

            Let me admit from the start I am a big fan of John Chen and what he has been doing at Blackberry.  My view is simple.  There is a difference between the way an executive or an attorney uses a handset and the way young people use them.  If you want to swap photos and videos, check Facebook, or surf the internet - Apple and Android are the way to go.  But if you want to exchange secure emails as quickly and efficiently as possible Blackberry has a far superior solution.  Even the handsets, with their external keyboards, are better.  The new Classic and Passport are the best email devices available today.

            This brings me to part two.  IBM should buy Blackberry.  Providing services to corporations and professionals is what IBM does best.  As such, it cannot afford to not be in the communications business.  Properly developed, hopefully with John Chen still on board, Blackberry can make them a leader in that field.  IBM has been struggling to grow.  Buying Blackberry, even at $15 per share, is a far more optimistic use of its cash than buying more IBM shares.

Monday, January 19, 2015

Fundamental Valuation and Investing

            It may seem like a time for crowing.  The position advocated in these posts, that GoPro and Tesla had reached values that were unsustainable, has been vindicated.  But it is a better time to take stock in the relation between fundamental valuation and investing, than for self-congratulation.

            Making money from fundamental valuation requires the confluence of three factors.  The first is that once the investor completes the fundamental valuation the estimated value differs significantly from the market price.  This is actually likely to be quite rare.  Assuming both the investor and the market are reasonably rational, the two valuations will typically be quite similar in which case there is no incentive to invest. 

            If the two valuations differ, then it must be the case that the investor is right and the market is wrong.  Think for a moment what this means.  It means that one investor is able to assess value more accurately than the weighted average of the valuations of millions of investors reflected in the market price.  How likely is that to be the case?

            But even if the investor is right and the market is wrong, the investor does not make money off the discrepancy until the market recognizes the error if it ways.  If the market gets even more wrong, the investor loses money.  This leads to the old Wall Street adage that, “The market can stay irrational longer than you can stay solvent.”

            So even in this moment of glory regarding Tesla and GoPro, the message is to be cautious and humble.  The circumstances under which any investor, even Warren Buffett, can identify meaningful market misvaluations are likely to be rare.  Over-weighting a portfolio to what you believe to be misvalued securities might lead to nothing more than bearing unnecessary risk.