Charlie Chaplin stands on Douglas Fairbanks‘ shoulders during
a rally at Wall Street in 1918. Source: Wikipedia. Image is public domain.

Dear Diary, 

We are sitting in the lobby of the China World Hotel in Beijing. It is a very large space and very unlike most hotels. 

Monday, we stopped into the lobby of the Marriott Opera Ambassador Hotel on Boulevard Haussmann in Paris. Like most lobbies, it was quiet, with just a few people having coffee. 

Here, there are hundreds of people – almost all young. I am the oldest person, a fossil from another continent and another time. The young people are dressed casually but well. They sit in groups talking… as though planning their next marketing campaign. 

There is scarcely anyone over the age of 40. We have started a small publishing business in China. It, too, is staffed by people in their twenties. 

What happened to the old people? Maybe they have not been able to keep up with the breathtaking changes in China. This is no country for old men… 

“Everyone has great confidence in the future,” says a Chinese colleague. “Things have gotten so much better over the last 20 years. And we expect that to continue. 

“Our new president, Xi Jinping, is serious about trying to get rid of corruption, even at the highest levels. He is trying to deregulate whole industries. Regulations and licenses were just a way for officials to demand bribes and payoffs. So, Xi wants to get rid of a lot of this so we can do business more freely.” 

Whether he will succeed or not, we can’t say. But at least it sounds promising. 

$10 Billion for Snapchat!

The truth is we never know what will work. And here we take up an important subject: how you can invest intelligently in a world of ignorance.

It is so important and so weighty, it needs a real-world introduction. And it can be so tedious that we must offer you a reward for paying attention. 

Yes, dear reader, you will be the first to know about our new trading system. It’s guaranteed – almost – to beat the market. But first, let us turn to the “Wolf of Wall Street” – financial commentator Wolf Richter, that is: 

It was leaked on Tuesday [of last week] by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds.The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.

That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”

At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).

Nutty Valuations

What makes photo-messaging app Snapchat stand out is that it has no business model… no revenue… and no profits. 

It has, as near as we can tell, a lot of young users who send photos to one another… often explicit in nature. These photos – known as “Snaps” – then disappear after a number of seconds. 

How can Snapchat monetize that? Who knows? 

Perhaps a better question: Why would a bunch of rich, rational money-grubbers at KPCB want to invest good money in Snapchat? 

We don’t know. Maybe they know something we don’t. Maybe they have a lot of this kind of inventory in stock? And maybe they believe that pumping up the whole sector will be good for business. 

What’s their business? 

It is simple: Smart guys sell things to guys who aren’t so smart. The pros unload onto the amateurs. Wall Street touts IPOs to mom-and-pop investors. 

Putting a little VC money into Snapchat… giving it a nutty valuation… is like bidding up odd paintings by contemporary artists. Quirky works of art suddenly become valuable simply because someone paid a lot of money for them. 

With no earnings to guide prices, valuations can go to the moon. KPCB – with a lot more Snapchats where this one came from – is along for the ride. 

But do you, dear investor, want to be taken for a ride too? 

More on this… tomorrow



Market Insight:
How to Spot a Bargain 
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

The S&P 500 has delivered a 20% annual return over the last five years. 

As is always the case, these returns act as a kind of “siren song,” pulling a lot of individual investors back into the market. 

In other words, most folks make investment decisions based on extending recent trends out into the future. 

This is usually a BIG mistake… 

What you need to understand about this rally is that it is an incredibly rare event. 

Going back to the late 1800s, this kind of rate of return over a five-year period has happened only four other times. 

Investors in 2014 have seen five returns of 20% per annum. But so did investors in 1929, 1936, 1987 and 2000. And if you know your market history, you know that what happened next was a major crash. 

And in 1929, 1936, 1987 and 2000, investors thought the gains would go on forever too. 

This is not to say that we won’t see the S&P 500 rally further from here. That is entirely possible. The point is that ignoring the cyclical nature of markets can be very dangerous indeed. 

And the reason it’s dangerous is that the further prices move away from their historic average, the more likely they are to move back toward their average. 

But this is not how most investors perceive the world. Instead, when prices are rising, they rush out and buy in anticipation of even higher price increases. Then, when prices are falling… and the market is placing quality assets on the “bargain counter”… they suddenly become risk-averse again and sell along with everybody else. 

The best way to think about the market is not as some sort of rocket that climbs higher and higher but instead as a pendulum swinging from one extreme to another. 

As with a real pendulum, the more it swings to one extreme, the greater the force there is pulling it back toward its midpoint. 

That’s why at Bonner & Partners we urge our readers to ignore market darlings and instead focus on investments that are overlooked, ignored and downright despised. 

That’s because the pendulum also works in reverse. The further below the average market prices are, the more likely they are to rise back to meet their average. 

Or as value-investing legend Seth Klarman puts it, “Generally, the greater the stigma or revulsion, the greater the bargain.” 

So how do you find bargains? 

Here are three telltale signs to look out for: 

1) They are defective in some way… or undergoing a period of intense change.
2) They are ignored by the media. And if you hear about them at cocktail parties, it is in negative terms.
3) Their price has been falling… perhaps sharply… causing most investors to extrapolate this trend out into the future and ignore the value on offer.

It’s not that popular investments don’t make people money. But as Bill warns above, those who profit are usually the Wall Street shills selling them to the unsuspecting public.