Weekend Reads for Investors: Burn Notice
Six years ago global equity markets were reeling in the aftermath of the Lehman Brothers collapse. Credit markets seized up overnight, exacerbating a liquidity crisis that brought the worldwide financial system to the brink of disaster. This helps put the recent pull-back in stocks in perspective but also serves as a reminder that circumstances can turn on a dime. Prior to the 2008 meltdown, Citigroup’s (C) then-CEO Chuck Prince acknowledged as much when he quipped, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Of course, history shows the music stopped shortly thereafter.
The current bull market has been led of late by an increasingly small band of stocks, principally from the technology sector, and such narrow market breadth should be cause for concern for all but the most intrepid of investors. Even those who make a living in the high-wire world of venture capital are sounding a note of caution. Three prominent tech investors recently weighed in on the state of Silicon Valley and a liquidity crisis of a different sort — cash burn rates. Their sober warnings, recapped below, may have played a role in further dampening Wall Street’s mood as the third quarter came to a close.
Bill Gurley, Benchmark Capital
In an interview with the Wall Street Journal, Gurley said, “I think that Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now — unprecedented since ’99.”
He continued, “The average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99.”
Fred Wilson, Union Square Ventures
Wilson chimed in on his blog, applauding Gurley’s focus on burn rates: “Burn rates are exactly that. Burning cash. Losing money. Emphasis on the losing. And they are indeed sky high all over the US startup sector right now. And our portfolio is not immune to it. We have multiple portfolio companies burning multiple millions of dollars a month.”
He concluded, “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.”
Marc Andreessen, Andreessen Horowitz
Paraphrasing Warren Buffett, Andreessen took to Twitter to add, “When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate [companies] will VAPORIZE.” His parting warning:
18/Worry. — Marc Andreessen (@pmarca) September 25, 2014
Below are some other stories that caught my eye in recent weeks.
- Bruce Berkowitz explains why nearly 80% of his portfolio is in four financial stocks. (WealthTrack)
- Cliff Asness on hedge funds: in many cases, “you’re paying 2 and 20 for Jack Bogle.” (BloombergTV)
- Grant’s Interest Rate Observer on Argentina: “The country’s a mess and it pays mess-appropriate yields.” (Enterprising Investor)
- Lord Adair Turner warns that the shift towards a high-tech, high-touch economy could threaten financial stability. (European Investment Conference)
- Edward Luce on the short-sighted US buyback boom. (Financial Times)
- Tom Brown says, “Shareholders should get the profits.” (Bankstocks.com)
- Aswath Damodaran on the good and bad of share repurchases. (Musings on Markets)
- Are dual-class shares a troubling trend for investors? (Market Integrity Insights)
- “Do Valuation Shorts Work?” (Enterprising Investor)
- “Want Better Returns? Check Your Manager’s Resumé” (Chief Investment Officer)
The Financial Crisis Revisited
- “Revisiting the Lehman Brothers Bailout That Never Was” (The New York Times)
- The damning allegations of a New York Fed examiner. (ProPublica)
- Michael Lewis’s reaction to the “The Secret Goldman Sachs Tapes” (BloombergView)
- “The AIG Trial Is a Comedy” (The New Yorker)
- “Richard Branson: Virgin’s Stunt Man” (The Washington Post)
- Having made a career of spotting trends, “Bill Gross missed the big shift” (Financial Times)
- Josh Brown asks, “Do We Need to Fire Pimco?” and provides a thorough post-mortem. (The Reformed Broker)
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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
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