There has been a great deal in the news about the office-sharing company WeWork, which rose to prominence over the last few years, as revenue grew rapidly and its outspoken CEO made headlines. WeWork, and other formerly private enterprises such as Uber and Lyft, gained notoriety by obtaining higher and higher valuations from accommodating capital markets. These record valuations were achieved despite the companies reporting huge losses, which only seemed to get worse the more revenue grew.
The hope for these companies is that they will obtain enough market share, where they can ultimately enhance their margins through price increases or improved efficiency. To put it into perspective, WeWork raised money in a funding round in January at a valuation of $47 billion dollars. The company tried to execute an IPO last month, but investors balked when they saw the cross-dealing ways of the CEO and poor corporate governance. After getting rid of him, the company faced a funding squeeze, which was only alleviated by its largest shareholder Softbank injecting cash. The WSJ reported that the emergency financing round would give the company a valuation of about $8 billion, marking an 83% decline in market value in 9 months.
A few years back, all anyone could talk about was Bitcoin. After it had crashed, the next phenomenon was Marijuana stocks. Bitcoin and the legalization of marijuana are both powerful stories and lots of money will be made. However, one must weigh the opportunity with the fundamentals, and the risks associated with them. In an industry of hundreds of competitors, not every company will win. Often there are fraudsters and opportunists taking advantage of market participants’ willingness to give them money at any price to chase the story. The North American Marijuana Index, which tracks the leading cannabis stocks in the U.S. and Canada, has fallen more than 52% in the past 12 months, according to the WSJ.
One important lesson to understand about investing is that you don’t have to swing at every pitch. We need to make sure we understand the investment, meaning it is within our circle of competence. Then, after a careful examination of the enterprise, we must see a large margin of safety between the price offered and the intrinsic value of the investment. It would have been nearly impossible to have performed these tasks and come to an affirmative conclusion on many of these speculative companies. While we miss their bubbles forming, we also miss the crashes and hold on to our money. Fortunately, there are thousands of investment opportunities and we have been finding ones that work, growing our money in what we believe to be a sustainable and satisfactory fashion.