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Monday, 24 March 2014

The New Alchemists

Alchemy: Magic and gold: we all love it, always have, always will. Investors are no different - in fact, they are the worst: they back their dreams with cash (often other people's).

The dotcom bubble of the 1990s was fuelled by the wizardry of high tech Harry Potter's punctured only when commercial reality, dressed like the little boy in the Emperor's New Clothes shouting "you've got nothing on", burst through.

As much as investors love alchemy, they are nonchalant of reality. History is irrelevant, tomorrow is everything. This is why Amazon has a market capitalisation of $165.6bn and trades on a P/E ratio of 1307; whilst Walmart's market captilisation of $246.6bn is a paltry P/E of 14.6
Valuing a company on a forecast of a millenium of earnings seems like the hubris of the Third Reich declaring it will last a thousand years. One thing is certain: new players will arise, innovate and encroach. Just ask Nokia and Kodak.

The market is addicted to alchemy and when Alibaba floats, the markets will scream "Open Sesame" and likely place a valuation of between $150bn - $250bn on the business

The message is simple - alchemists spin enticing visions of future riches...but at some point, reality will catch up and tomorrow's businesses become today's stalwarts and markets fall out of love. The correction in value will be devastating.

We hope you enjoyed the show, magical wasn't it?

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