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Investment things that make you go ‘Hmmm …’

Increasingly, stories in the financial press contain facts and statistics the wider market apparently thinks are completely reasonable but only put us in mind of a Top 10 hit from almost three decades ago

06/12/2018

You know how a song lyric can keep popping into your head?

Well, here on The Value Perspective, it is the title of a song that was a Top 10 hit on both sides of the Atlantic back in 1990 for C+C Music Factory (thank you, Google) called ‘Things That Make You Go Hmmm …’ And it is popping into our heads with ever greater frequency when we read the financial pages.

As investors with a determinedly long-term outlook, we find the Financial Times can introduce rather too much short-term ‘noise’ into our lives.

That said, the Weekend FT version does contain some good articles though, increasingly, it also has things that make us go ‘Hmmm’.

Let’s pick an edition at random from last month – 17/18 November – and focus on two ‘Hmmms’ and, for good measure, a ‘Will we never learn?’.

'Hmmm' 1

On the second page of the Companies & Markets section ran the story ‘Private equity dealmakers surf a wave of cheap debt’, which you can find online as Credit boom: Private equity bounces back on cheap debt bubble.

It sounds positive – surfing always does – and indeed the opening line was: “Four leveraged buyouts worth $10bn (£7.9bn) or more have been announced so far in 2018 – more than double the tally in any year since ...”

Actually, can you guess the year?

Yes, as so often these days in ‘Record year since’ stories, it was 2007. The accompanying charts also indicated highly leveraged private equity deals were back in 2007 territory – and so many references to the year that preceded one of the worst downturns in market history really ought to make you nervous.

Or at least go ‘Hmmm’.

'Hmmm' 2

Then, two pages on, came the story ‘Stablecoins spring up as crypto tries to shed Wild West image’, which you can find online as Stablecoins are crypto sector’s next big bet.

With bitcoin worth around a quarter of what it was a year ago, cryptocurrency advocates at last seem to have worked out both the sector’s problem – its volatility – and a solution.

The trick apparently is to add the word ‘stable’ into the mix and list the result.

Stablecoin, the FT explained, is “a new hybrid breed of cryptocurrency that typically bridges mainstream and digital finance and has proven to be the latest craze in the nascent but fast-moving sector”. “Rather than floating freely on the market, these digital currencies are often pegged to stable real-world assets, from currencies to commodities,” it continued.

“For example, buyers can pay one dollar to receive one digital coin, which they can later redeem for the dollar if they choose to cash out — all but eliminating the wild price swings that have become commonplace in cryptomarkets.”

Clearly some are convinced, with the FT noting the value of all stablecoins had already hit $3bn, while their issuers have attracted some $350m in venture capital funding.

Potential downsides highlighted by the piece, meanwhile, include “technological limitations such as a lack of scalability, and the fact that even the newer coins are not always as stable as their name suggests”.

You might also add that a digital asset backed by an actual asset, such as a dollar, sounds an awful lot like money and ‘all but eliminates’ the need for the digital asset.

Or you might just go ‘Hmmm’.

'Will we never learn?'

Finally, on the page opposite, was the headline ‘Digital estate agents battle to build on hype’, which you can find online as the slightly kinder Digital real estate start-ups battle to build on early promise.

As this piece put it, online operators such as Purplebricks are now “grappling for share with innovative but risky strategies” as their “hopes of market domination fade”.

In essence, rather than charging a vendor a percentage of the proceeds if they help sell their house, these businesses are adopting low-cost models, such as charging an upfront fixed fee – whether or not the house sells.

So, on the one hand, the vendor pays a lower price; on the other, however, there is no commitment to sell and very little in the way of human involvement.

As the FT piece noted, “Purplebricks’ London floatation in 2015 began an era of large-scale investment in digital alternatives, while also raising the sector’s profile” – which is a decent recipe for inflated valuations.

Digital estate agents went on to ‘surf a wave’, so to speak, to the extent that, a year ago, Purplebricks’ own share price stood at around 360p – more than double what it is today – and was as high as 460p this January (past performance is not a guide to future performance).

Now, however, with global real estate markets cooling – if hardly depressed – this new breed of estate agents, for whom some investors had such high hopes, are finding life very difficult indeed.

Or, as the FT put it, the fight for market share has intensified and “caused analysts to water down their predictions of wholesale digital disruption”.

Google will know if C+C Music Factory ever had a follow-up hit called ‘Will we never learn?’.

We are not recommending you buy or sell any stocks or financial products based on information in this piece and they're purely being used as an example to illustrate a point.  

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