In the small towns where I grew up, OK Bazaars was a big deal. We all shopped there and I worked there as a checkout teller during the holidays. Perhaps that was why the first share I ever bought was OK Bazaars. I thought I’d got it at a good price because it was trading at a discount to net asset value (NAV), which at least would provide some underpin to the price I paid. I was wrong then, and I’d be spectacularly wrong today if I let NAV be my primary guide to value — it’s so last century.
As I grew up in the investment world we graduated from NAV to price-earnings (PE) multiples, which made a bit more sense except that they looked at past earnings. So we moved on to forward PE multiples. In so many sectors these multiples either didn’t make sense at all or weren’t sufficiently comparable. We moved on.
Discounted cash flow models were next. Mostly we argued about the appropriate weighted average cost of capital discount rate that should be applied to the forecast cash flows, to determine their net present value and with that the price you should be prepared to pay for them now. The actual forecasts received less attention because you couldn’t really argue with the (better informed) management who prepared them.
These age-old, respected measures of value are still reported and used today, though they are mostly useless in determining, never mind predicting, the market prices of listed equities. I have no idea what the consistent best metrics are today. Supply and demand still ultimately determine price, but what drives those inputs is a little more complex, if not mysterious.
Moods matter. Data matters. The more data points you have, the closer you are to the human source, the more able you are to influence purchasing preferences. Ask artificial intelligence to help you — it matters not what you think, but what the masses are doing — and you can leave the rest for the algorithms to feast on.
Data is a two-way highway and we know as much about what you’re making (because you told us) as you know about what we want (because you told us). Speculation about what the masses must have, want or need is what’s driving share prices.
Are electric cars going to dominate? Enough people believe so for the share price of Tesla to increase 5.5 times in the past year, making it more valuable than Toyota. Go, Pretoria boytjie! Don’t you dare question this — short-sellers have lost $23bn so far.
In the midst of the Covid-19 storm, should the JSE and S&P have their best quarterly performances in two decades? There are cogent reasons. The top-performing stocks couldn’t care less about Covid-19. This virus is not transmittable within computers or in the internet where the new economy plays.
Broader brush explanations also make sense. “Don’t fight the Fed” in its quest to make money worthless so that asset prices can inflate, as established capital circulates among the Already-Haves. They have more money to be wrong than you’ll ever have to keep betting you’re right. The result is Tina (there is no alternative) to invest in.
Rather just reflect on how you’re spending your day. How many hours on social media? How much searching or buying online, and what? How long in Zoom meetings? Where do you source the food you’re eating? What and how many medicines are you taking every day to keep yourself within the acceptable averages? How much energy do you use? How long are you out of your house, doing what? What are the children up to?
Once you’ve figured that out for yourself and compared similar numbers for a wide enough circle of friends, you’ll know where to invest your cash.
• Barnes, a former SA Post Office CEO, has had more than 30 years of experience in various capacities in the financial sector.
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