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

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

Latest Updates

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Superannuation

The Division 296 tax is still a quasi-wealth tax

The latest draft legislation may be an improvement but it still has the whiff of a wealth tax about it. The question remains whether a golden opportunity for simpler and fairer super tax reform has been missed.

Superannuation

Is it really ‘your’ super fund?

Your super isn’t a bank account you own; it’s a trust you merely benefit from. So why would the Division 296 tax you personally on assets, income and gains you legally don’t own?

Shares

Inflation is the biggest destroyer of wealth

Inflation consistently undermines wealth, even in low-inflation environments. Whether or not it returns to target, investors must protect portfolios from its compounding impact on future living standards.

Shares

Picking the next sector winner

Global equity markets have experienced stellar returns in 2024 and 2025 led, in large part, by the boom in AI. Which sector could be the next star in global markets? This names three future winners.

Infrastructure

What investors should expect when investing in infrastructure: yield

The case for listed infrastructure is built on stable earnings and cash flows, which have sustained 4% dividend yields across cycles and supported consistent, inflation-linked long-term returns.

Investment strategies

Valuing AI: Extreme bubble, new golden era, or both

The US stock market sits in prolonged bubble territory, driven by AI enthusiasm. History suggests eventual mean reversion, reminding investors to weigh potential risks against current market optimism.

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.