Valuation is a sensitive topic for everyone. “You get what you pay for”, is a common phrase we all grew up with.
Paying the price to get Michael Jordan on your team is definitely worth it and would add value for the entire team by making the whole team play better. Just like a good stock minimizes portfolio fluctuations in a downside scenario. But the question remains, how many Micheal Jordans are there? I only know of one. You may be tempted to pay a Michael Jordan price for a player that might not pan out, you have as a result wasted all that money that could have gone to another player that might have been able to make your team incrementally better.
Boring vs Exciting, the faster the revenue growth, the more mysterious the business, the more known unknowns, the more speculative the business the more people like it. People at parties would rather hear about the exciting up and coming biotech company or how fast google is growing rather than the unexciting oil and gas exploration business.
There are two main problems with successful companies at the forefront of innovative trends. The first problem is that success has competition, any successful business will eventually have competitors that will shrink profit margins. For example look at Apple computers, Apple turned the mobile phone industry in their heads when they came out with the touchscreen iPhone. Their success invited competition from Blackberry, Palm, and Google. It will take some time for RIMM, GOOG, PALM to catch up but honestly it is only a matter of time before they do.
The question remains, how do we get something worth more than what you orginally paid for? Simply, how do you buy it on sale?
The answer lies within the inner shopper. There are certain times of the year that clothes go on sale. We all know that the time to buy summer clothes is in August/September. Retailers are forced to sell their merchandise at a discount (one example of forced selling) so that they can make space for the fall season clothingline.
Forced selling is your friend, it is an event that occurs from time to time for various reasons. It is an opportunity that allows you to potentially buy a stock on sale. A company ratings downgrade, negative newspaper article, bad earnings quarter, news that xyz hedge fund is short the stock, are all possible reasons for forced selling.
As my wise coworker once famously said, it can always get worse!
