How So Many Investors Confused Brains With a Bull Market... Also, a Note on Housing Prices

One hallmark of the past (fill in the blank) years is that some investors only know a world in which stocks go straight up... And that every dip is a buying opportunity in every stock. It goes for private companies, too – perhaps especially private companies, with so many born-in-a-bull-market entrepreneurs confusing brains with a […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] How So Many Investors Confused Brains With a Bull Market... Also, a Note on Housing Prices By Herb Greenberg --------------------------------------------------------------- [Man Who Called 2020 Crash Says: 'Do This BEFORE the next rate hike']( Joel Litman's unique stock market "early warning" system is flashing red on some of the most popular stocks in the market. In fact, he believes 14 heavily owned stocks will get crushed when the Fed raises rates. But there's more to the story than that... You see, Joel's system is signaling something else odd... A strange shift ahead for the stock market. Joel believes a few surprising stocks will soar as the Fed raises rates. And you could profit, if you get in now. [Click here to watch Joel's full interview – FREE](. --------------------------------------------------------------- One hallmark of the past (fill in the blank) years is that some investors only know a world in which stocks go straight up... And that every dip is a buying opportunity in every stock. It goes for private companies, too – perhaps especially private companies, with so many born-in-a-bull-market entrepreneurs confusing brains with a bull market when it comes to the values they've come to expect. All of this was front-and-center last week when venture capitalist Bill Gurley, who cut his teeth as an Internet analyst before the dot-com bubble burst, [tweeted](... Gurley continued with a thread of several thoughts that generated quite a bit of chatter – at least to folks on Twitter (TWTR). As he went on to say... - Previous "all-time" highs are completely irrelevant. It's not "cheap" because it is down 70%. Forget those prices happened. - Valuation multiples are always a hack proxy. Dangerous to use. If you insist, 10X should be considered AMAZING and an upper limit. Over that silly. - You may be shocked to learn that people want to value your company on FCF and earnings. Facebook trades at 14X GAAP EPS, & is growing 23%. What earnings multiple are you assuming? - Revenue & earnings QUALITY matter. The truth is that revenue and earnings and accounting quality always matter –not just when stocks were going straight up... During the latest mania, somebody said to me, "When the game changes, you change how you play the game." That sounds great in principle, but in practice it's the greatest of all greater fool theories, because nobody knows when the game will change... until, of course, after it does. And when it did this time, a lot of supposedly smart people didn't realize there was a hole in the bottom of the bag they were holding. All of this is easy to say (and for many, to see) after the fact. But it all comes back to the difference between trading, speculating, and investing – all three are heavily nuanced, depending on your objectives, biases, and tolerances for risk. I've been fairly vocal lately about the return of investing in real companies, as I did last week with my Empire Financial Daily essay titled, "[Revenge of the Real Companies]( Real companies, not surprisingly, are also the focus of my newsletter, Investment Opportunities – you can learn more about it [right here](. --------------------------------------------------------------- Recommended Link: [Steve Jobs' New Era]( Steve Jobs pointed to one industry as "a new era" and compared it to the digital era that exploded when he was young. He also predicted this new era will usher in the biggest innovation of the 21st century. One small company is positioning itself to monopolize this era, just as Steve Jobs' Apple, monopolized the digital era... [Get the full details here](. --------------------------------------------------------------- I couldn't help but think of real companies when reading Gurley's Twitter thread... But his comments take on greater significance since he comes from a background of analyzing and investing in emerging technology... and has seen his share of highfliers. Perhaps none was as high flying as Netscape, the darling of the day, which Gurley dared to downgrade in 1997. At the time, he was a 30-year-old star Internet analyst, and Netscape was the company whose browser served as the launching pad for Internet 1.0. His Netscape call caused the stock to plunge, and a few days later [he told me]( how hard it was trying to analyze companies whose valuations had lost touch with reality. As he said... From my point of view, living in a world where stocks are trading at 10 and 20 times revenues and trying to provide value as an Internet analyst is very difficult. When stocks similar to these reinflated a little more than a decade later, Gurley wrote a [blog item]( in 2011 suggesting that investors might want to pay attention to the quality of those companies... Perhaps it is not peculiar that our good friend the price/revenue ratio is back in vogue. But investors and analysts beware; this is a remarkably dangerous technique because all revenues are not created equal. Keep in mind that Gurley wrote that when 10 times revenue was considered nosebleed for tech company valuations... And it was a decade before those valuations went absolutely insane. (I touched on just how insane in the [December 7 Empire Financial Daily]( about whether valuations were finally starting to matter.) The beauty and timeliness of Gurley's essay, even though it was written so long ago, is its focus on "quality" as values skyrocket. In that essay, he listed 10 "key business characteristics that would be used to separate high quality revenue companies from low quality revenue companies, and therefore are the distinguishing traits that warrant high price/revenue multiples." His bottom line... If we've learned anything from the past market cycles, it's that the fundamentals eventually matter, and all revenues are decidedly not created equal. Once again, he wrote that in 2011. It was relevant then... It's relevant today... And it'll be relevant tomorrow. Speaking of earnings quality... If the concept of earnings quality is new to you, head over to Macro Op Musings, which features [a review]( of the book [Quality of Earnings]( by Thornton (Ted) Oglove. In earnings quality circles, Ted is a legend. He's also a heckuva nice guy, who I've been lucky enough to get to interview quite a bit over my career. His book is legendary. (You can read more about him [on his website]( The Macro Op review examines the newsletter author's favorite chapters. It's a great springboard for those who want to dive deeper, consider buying the book, and as Macro Op's author says, learn the difference between "fake" and "true" earnings. Moving on, if Southern California is still a trendsetter, then I'd say when it comes to housing prices, 'Danger, Will Robinson'... The proof is in the numbers, which couldn't be clearer than in this [tweet]( from Orange County Realtor Steven Thomas, who writes Reports on Housing... Interpret at will. Have a great weekend, everybody. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg May 6, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](