You Can't See An Asset Bubble From The Inside

I can attribute some of my portfolio's success to the avoidance of asset bubbles.  If I had been invested in any of the crazes that hit the markets since the mid-'90s I'd be in a world of hurt.  Fortunately I don't follow crowds.  

I stayed in cash and fixed income while plenty of very smart people chased dot-com dreams in the late 1990s.  I remained in cash after that stuff peaked in March 2000 and wiped out plenty of people who thought they knew better than me.  I had a bad feeling about the Federal Reserve's stimulative monetary policy of the early 2000s and didn't want to pick the next bad thing by accident.  

In 2002 I attended a hiring conference in the San Francisco area (one of the Burlingame airport hotels to be precise) put on by one of the recruiting firms that love to place former military officers with large companies.  I sometimes wonder whether these recruiters collect the first-year bonus their candidates would otherwise get if they were hired on their own, but that's not germane to this article.  The clearest memories I have of that hiring conference were the pitches the recruiters gave for homebuilders, specifically Pulte and Centex.  The home mortgage bubble was in full swing and developers were busy paving over pristine farmland in Stockton, Pleasanton, and elsewhere to accommodate the Greenspan Fed's loose money policy.  The housing bubble sure looked great to the people inside homebuilders who thought they had it made.  I decided to pass on the homebuilding jobs available; they just weren't suited for my white-collar ambitions.

In 2005 and 2006 I was a trainee broker at UBS Wealth Management in The City, an outsider among the anointed children of our hereditary ruling class.  Some of top-producing brokers swore by real estate mutual funds tracking the Cohen & Steers Realty Majors Portfolio Index, thinking they were geniuses.  I went the other direction and bought a structured note (in my own portfolio) that bet on a decline in the homebuilding sector.  I was later fired from that brokerage job for having produced zero revenue, but I liquidated that structured note at a hefty gain when I was forced to transfer my account to another firm.  

My most loyal readers, all three of them, may be aware that I believe defense spending to be an unsustainable bubble.  I have tried in vain to convince my military friends not to pin their hopes on a second career with defense contractors.  The Pentagon itself is probably in denial about the bubble it helped inflate, with very little visible contingency planning underway for a radically austere future.  

Some things never change.  A lot of defense sector bulls are going to be let down.  That suits me just fine.  I'll be ready to buy the defense stocks they'll be forced to abandon.  

Full disclosure:  No positions in any companies mentioned.

Zynga Prepares IPO For Web-Addled Investors

I stayed away from the original dot-com bubble because I couldn't understand how any of the companies hyped in Red Herring, Upside, and other now-defunct industry cheerleading magazines would ever make money.  Now a new Internet bubble is ready to carry away all of the investors who got carried away in dot-coms, real estate, CDOs, and other stuff that didn't work out. 

Zynga is getting ready to show the world why it deserves a valuation of almost $9B on net income of only $12M.  Maybe I should cut Zynga some slack since it apparently made a profit of $400M in 2010 (I'd sure like to know where the WSJ got that number).  Tomorrow's IPO will be a sweet deal for the founders once the lockup ends.  The company only earns revenue from 3% of its user base.  In other words, 97% of Zynga's brand-loyal users get a free ride.  I wonder if the percentage of Microsoft Office users worldwide who pirate the software even comes close to 97% of the total market.  Microsoft has the pricing advantage of an operating system accepted worldwide as a standard, with enormous switching costs and opportunity costs for businesses wishing to opt out on competing platforms.  Online gaming has no switching costs at all.  Continuously churning out hot titles is all that matters.  The "Angry Birds" company Rovio is now envisioning big paydays from an IPO.  Good luck with that.  I hope the founders cash out as soon as they're able. 

The dot-com bubble should have taught investors about the limits of a business model based heavily on giving away usable content for free.  LinkedIn currently trades at a P/E over 900.  That is clearly unsustainable.  A platform that attracted tons of potential customers with free content will only be able to convert a small number of them to subscribers at a premium price.  Investors chasing radical new business models need to know that customers accustomed to getting something for free can easily jump to another free service.  This is why Alfidi Capital offers free content to all users.  Let freedom ring. 

Full disclosure:  No positions in any companies mentioned at this time (except of course Alfidi Capital).  No intention or desire to participate in any future IPOs of said companies.  BTW, Alfidi Capital will never go IPO.  No way is anybody ever going to own me.