In Focus: Money Is Made in the Dark
Updated: Jan 17
We see it everywhere nowadays. Thanks to social media it's a lot more in our faces than it ever was. I'm talking about the cash flash. The flash of cash and riches can be viewed on every platform, Instagram, Facebook, Twitter, SnapChat, and YouTube.
It could be an Instagram influencer, a hard working YouTuber, or someone that bought a lot of Bitcoin at $5 and sold it at $5,000. This is the era of the cash flash. Get a little coin, show the world, and hope that the money validates you to people you don't know.
But do you know who makes a ton of cash, and who doesn't flash it? Smart investors, particularly value investors. These investors make lots of money in the dark, and they let big media outlets do the flashing for them.
Often we'll see a stock make an extraordinary move up, and that is followed by a hedge fund person appearing on a business television station or podcast, and being asked why she purchased when she did? It happens all of the time, or at least too much for me not to notice. I hope you've noticed.
Good investors don't flash cash, they make money in the dark and move on to the next thing.
2019 was a big year for private companies with familiar names coming to the public markets. We saw Uber (UBER), Lyft (LYFT), Pinterest (PINS), Beyond Meat (BYND), DataDog (DDOG), and Zoom Video Communications(ZM) go public. We also saw WeWork attempt to go public and fail miserably. But the story is about those stocks that went public and underwhelmed in the public markets, Uber and Lyft more than others received a good share of scrutiny after going public.
Lyft went public at $72 per share in April of 2019. By October 10, 2019 the stock had traded down to $37.70, its all time low and a 51.8% decrease from it's IPO price.
Uber went public a little more than a month after Lyft. Seeing Lyft's mistake, Uber priced their IPO a lot lower than initially planned. Uber went public at $45 per share and got as high as $47 per share, but eventually dropped in price as Lyft did. On November 14, 2019, Uber hit its all time low of $25.99, a 42% drop from its IPO price.
Pinterest, who I thought had the best IPO strategy. The company priced their IPO at $19, which I felt branded the company as a good little thing, and not the next great big thing. Pinterest saw some success after it's IPO surpassing $35 per share. The stock cooled off, but then retested the high again and traded up to $36 per share. But then the stock fell hard and hit a low of $17.45 on December 13, 2019. The low was 8% below the IPO price and 52% off it's all time closing high of $36.56.
Datadog went public in September 2019 at $27 per share. The stock saw a big pop out the gates, and then slowly trade down, until it hit a public market low of $28.76 in October of 2019.
When these companies went public, they had all the spotlight and all of the attention until the stock prices started fading. Once the stock prices didn't match the hype, the spotlight turned on something else, and this is where the smart investors rolled in.
Lyft is up 18% from its low and up 3.8% in the new year. Uber is up 52% from its low and up 33% in 2020. Pinterest is up 33% from its low, and 24.5% in 2020. Datadog is up 63% from its low of $28.76, and in 2020 the stock has gained 24%. These companies and their stock prices may not have lived up to the initial hype, but that doesn't mean they were bad companies.
Bad happens when the reality of the situation is below our expectations. You had high expectations for your favorite artist's last project, but it didn't meet those expectations, and because of that you've labeled it a bad album. It works the same way in the stock market. There were high expectations for Uber and Lyft, which they didn't meet, and the IPOs and the stocks were labeled bad. Unfortunately, many investors never ask, who's expectations were those and were those reasonable expectations? Often times, when it comes to the stock market, the expectations of the media and the management of the companies themselves are way too high.
Too Big to Pass On
Uber and Lyft have become internationally branded cab companies. Before Uber, did you know off the top of your head the cab company you were going to call when you landed in Montreal, or London, or Paris, or Miami? Now we all know that we're going to, or have the option to catch an Uber or a Lyft. When something becomes that important to everyday life, it's stock will eventually trade up to its real value over time. I know this, the hedge fund people that are going to flood your airwaves in a few months discussing their Uber and Lyft buys know this, and hopefully you now know this.
Stocks don't move up magically, it takes buying power to move stocks. Smart investors have been buying up, Lyft, Uber, Pinterest, and Datadog off the lows and have pushed the prices up.
Investors who were able to tune out the noise, and look at a company for what it is currently, and what it could be in 12-24 months, were able to put winners in their portfolio when no one noticed, and this is how it is done.
This is how wealth is created. No cash flash, no IG video with the new Lamborghini or Tesla, but quietly, accumulating undervalued assets while other people are doing whatever it is they do.