Facebook (FB) has a $100,000,000,000 market cap? In so many ways that doesn’t make sense to me. People are expecting great things from them. That’s the nature of investing. Investing is about expectations. Use the past to extrapolate from the now to what is expected in the future. We do that in our daily lives, despite the fact that the only reality is the now. Sometimes we anticipate to excess.
I’ll begin with a short vocabulary lesson. Market cap is short for market capitalization. Does that help? Probably not. Roughly, capitalization can be a measure of net worth, cash in the bank, or the monetary fundamentals of a company. Small business failures are frequently attributed to being under-capitalized; i. e. they didn’t have enough money to build the product or advertise or hire enough people. My art photography is currently under-capitalized because my business account doesn’t have enough cash to pay for the photo processing, printing, matting, and framing. I might jump that hurdle by borrowing, by using credit to get capital at a cost. Market cap is a bit different. Market cap is what the market guesses is the value of the company, not its net worth. The net worth is on the balance sheet. The market cap is simply the price of the stock times the number of shares of the stock. As the price fluctuates the market cap fluctuates, even though nothing may have changed at a company. (For a more detailed description of Market Cap, go check out or buy my book, Dream. Invest. Live.) Market cap and net worth differ by the present value of the company’s future.
The market is thinking that Facebook is worth $100,000,000,000. There are only 7,000,000,000 people on the planet. Maybe it will work out somehow. Maybe Facebook will find a way to make $140 from every person on the planet, even the shepherds in Bangladesh. In the meantime, Facebook has only made $1,000,000,000 in a year. That’s a big number, but common for corporations. The price of Facebook divided by its revenues, its price to sales ration, P/S, is 100. Dull companies may have P/S down around 1 to 4. Growing companies may be more like 6 to 10. Exciting and disruptive companies may have P/S in the neighborhood of 20. Higher numbers are based on an eagerly anticipated future. A company may make no money in the current year, but expectations of their successful product launch next year can draw in some investors even though S is near zero now.
Then there is fear and greed. Emotions can negate logic. I think that’s one reason why some of my holdings (AMSC, DNDN, GIG, MVIS, and RSOL) have such poor stock prices. Investors fear the impact of the China spy scandal on AMSC. DNDN is feared to be the target of conspiracies or competition or both. GIG is fearless, but no one knows about them, and apathy can be as bad as fear. Investors fear that MVIS’s great products will fail because of operational and financial concerns. And as near as I can tell, RSOL is feared because it is in the same industry as Solyndra. Except for MicroVision, each of these companies are making tens or hundreds of millions of dollars per year. Yet each is only valued at P/S less than 6, not 10 or 20 which would be appropriate for such revolutionary companies, and definitely not 100. Investors are fearing the future of many small companies and are eager for the future of Facebook. That disconnect can be an opportunity, or a colossal “I told you so.”
The consequence of that disconnect means my investments are being sold too cheaply. I’m selling too much stock to pay my bills. If you’ve been reading this blog you’ve heard about it. Some have heard the tinges of fears. We are fractal. The same things that can happen in the market can happen within a human. Emotions can negate logic. Logically the probability that all of my stocks and efforts will financially succeed is very small. And yet, at various times it was easy to eagerly anticipate that possibility. Go back and check what I was writing on my original blog as DNDN rose, or as I released Dream. Invest. Live. Logically the probability that all of my stocks and business efforts will fail to support me is also very small. Yet it is too easy to dive into the anxiety of extrapolating from where I’ve been and where I am. My net worth is decreasing. Months of applying for jobs has only resulted in one interview, and that was for a part time job. My business is keeping me busy, but is not profitable. My recent financial past has a bad trend.
My portfolio may not be filled with enough for retirement at current valuations, but it still contains enough for months of living expenses. My house may be for sale, but it is still mine, I enjoy it, and a large enough financial improvement would mean I could keep it. My business may not be profitable, but my efforts have established a structure that can support impressive success. I’m glad I already understand frugality, because others find it is a lesson that is hard to learn when it is imposed. I can eagerly look ahead to a future that exceeds my past accomplishments. I can anxiously look ahead to a future that dives below my previous lows. Both efforts help me plan my actions. Eagerness encourages me to continue my efforts and shop for sailboats. Prudence encourages me to put my house on the market, maybe have a garage sale, and consider other options.
All of that is less important though than recognizing what’s here and now. Acknowledging what’s happening now is my lesson. As I sit here there is no reason to fear. I am comfortable. It is a beautiful spring day. I am healthier than I’ve been in a long time. Of all the places I’ve lived and visited, this is my home. I live amongst friends and community. If my life was extrapolated as a horizontal line from this moment I’d be pleased. My life today would be considered wealthy by billions of people. As I typed this, a friend dropped by to offer me a credit for a meeting space because they like having me in the space. Looks like I’ll be teaching Modern Self-Publishing on October 20th. Serendipitous events happen, large and small., and sometimes without planning or schedules.
Investing was only one word of three in the title of my book, Dream. Invest. Live., because investing shouldn’t consume all. Dreaming and Living are more important. Investing is merely a way to encourage dreaming and possibly enabling Living that Dream. Investing and Dreaming are anticipations. What do I want to do with this life? In this society it is necessary to ask how much money will that take. What’s a way to make more money if there isn’t enough already? They are valid questions, but anticipations can become traps because tomorrow is always a day away.
Living is reality. Whether it is living the dream or not, living is the here and now; and as I look around, the here and now are very nice. The here and now are the only things my senses and I can ever enjoy.
So, Facebook has an amazing market cap. I think each of my stocks should be valued my higher. I think Facebook’s valuation is driven by overly-eager investors. I think Dendreon’s valuation is driven by overly-anxious investors. I think the real answer is somewhere in between. I’ll use that as macro example of my situation. Don’t be too eager. Don’t be too anxious. A bit of both is fine, and expect something good enough.