Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 51

One day, you’ll be glad you feel old and tired

During the last week, some very smart investors have been writing about Facebook’s acquisition for AUD21 billion of an app that, up until the announcement, I hadn't heard of. One successful fund manager wrote, “Clever people are doing things I don't understand and I am just feeling old and tired.”

The comment reminded me of those made by Warren Buffett in 1969 who, after the heady go-go days of the bull market, shut his private partnerships and handed all the funds (and Berkshire stock) back to investors, saying:

“The investing environment … has generally become more negative and frustrating as time has passed. Maybe I am merely suffering from a lack of mental flexibility … Quite frankly, I just don’t see anything available that gives any reasonable hope of delivering such a good year and I have no desire to grope around, hoping to “get lucky” with other people’s money. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”

One observer commenting on security analysts over 40 stated, “They know too many things that are no longer true”.

What's happening?

Something is up. Money is cheap and there’s oodles of it that has to find a home.  Arguably, there’s even more looking for a shrinking universe of safe harbours as it flees the emerging markets.

Coincidently, local commentators are excited that Joe Hockey has, apparently single-handedly, aligned the G20’s leaders to ‘go for growth’, and then suggested it will translate into further gains for the stock market.

Ashley Owen's articles in Cuffelinks (linked here) support Warren Buffett’s research that there is no relationship between economic growth rates and stock market performance. It is interest rates and corporate profits as a percentage of GDP that drive longer-term returns.

In this environment, it comes as no surprise that you have Facebook buying WhatsApp for more than the international debt of Sri Lanka, Tunisia, Cuba, Ecuador and a litany of other countries.

And you have Xero, the New Zealand cloud-based accounting software provider trading on a market capitalisation of $4.6 billion, even though it is yet to turn a dollar of profit from it 250,000 customers.

You might remember the tech boom of the late 1990s which peaked just as earnings multiples and book values had finally succumbed to new valuation metrics that relied on clicks and users, with little thought paid to how this traffic would be monetised.

Facebook has paid AUD46.70 for every one of the 450 million monthly WhatsApp users who send each other text messages, photos and videos via the internet, bypassing the costly mobile phone networks. You have to wonder how you are going to extract money from those who can’t afford to pay or don’t want to pay to send a text message on a mobile phone network.

Xero is trading on an eye-watering market-cap of $18,400 per user. According to Xero’s website, the most popular package is $720 per year. The annual revenue run rate might be $180 million if everyone was subscribing to the most popular package. The company is trading at 26 times revenue and there’s no profit as of yet.

Bricks versus clicks

You don’t need to be old and tired to realise that unlike the gold rush of the 1800s, online real estate is not in short supply. It is abundant and probably infinite and even if you secure the competitive advantages associated with the network effect by being a first-comer, online customers can still prove to be disloyal and fickle. And switching costs are low, as my team demonstrated recently by changing back to MYOB from Xero without a hitch.

Despite this, Xero’s market capitalisation is about the same as Flight Centre or Bendigo and Adelaide Bank, whose 2013 profits were $269 million and $359 million respectively. Xero’s market cap is higher than TPG, Platinum Asset Management, Boral and Tatts Group.

There have been some spectacular failures over the years in the internet space and I am not suggesting that Xero or WhatsApp will join the list. However, you do need to think about investing to the slow and gentle chime of an old grandfather clock, not to the rapid and almost hyperactive beeps of a Formula 1 team’s stopwatch.

It seems the pendulum is still swinging towards the cheap and easy money, and the delight of big deal-making will spur investment bankers to encourage others to do deals. These, in turn, will draw a crowd and prices will move ahead.

As I have said here previously, we haven’t seen the bubble yet but the seeds are germinating nicely.

When the investment pendulum swings back however, just as surely as it does on the grandfather clock, heady takeover premiums will give way to big write-downs and investors who savoured the best of the party will carry the worst of the hangovers. Then the previously old and tired might gain a bit of a spring in their step.

 

Roger Montgomery is the founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able

 

  •   28 February 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

It's the middle of reporting season: what's really happening?

banner

Most viewed in recent weeks

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

2 billion reasons to fix retirement income

A proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Div 296 may mean your estate pays tax on assets your beneficiaries never receive

The new super tax, applying from 1 July, introduces more than just a higher rate on large balances. It brings into focus a misalignment between where wealth sits and where the tax on that wealth ultimately falls.

Do super funds need a massive wake up call?

UK retirement expert, Guy Opperman, believes super funds are failing at supporting members in deaccumulation. Here is what Australia should do about it. 

Latest Updates

Retirement

How inflation is quietly moving the goalposts on retirement

Inflation doesn’t just raise today’s bills - it quietly increases the amount needed to retire, while simultaneously making it harder to save. Three steps to take before June 30th to improve retirement outcomes.

Investment strategies

Three strategies for investing amid AI whiplash

AI fears have shifted from bubble talk to disruption anxiety, driving investors toward asset-heavy, 'AI-resistant' businesses while punishing many software and service firms. This environment may be ripe for stock pickers.

Investment strategies

Are private market assets the answer in an unstable world?

Private markets can offer diversification and return potential, but their opacity, scale and wide dispersion of outcomes make manager selection and due diligence critical for non‑institutional investors.

Property

Mispriced in plain sight: The case for Global REITs

Global REITs have fallen out of favour, trading at deep discounts after years of underperformance, despite resilient earnings and improving fundamentals.

Investment strategies

Survival is the only success

True financial success isn’t about how much you make, but whether you can sustain it — survival is the only win that matters.

Investment strategies

$42 billion too late

Why Australia's biggest energy bet may already be redundant while a less celebrated government program is exceeding expectations. 

Investment strategies

Do investors accept lower returns from assets that make them feel good?

Assets that deliver emotional satisfaction tend to offer lower financial returns, as investors accept an “emotional yield” in place of performance which shapes how investors approach ESG and unpopular assets.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.