Recently, I often hear from “investors” saying that fundamentals don’t matter anymore. To me, that is an indication of the rampant speculation going on in the market place. The “Jenga” tower is beginning to waver.
Speculation is when someone buys something without fundamental underpinnings hoping someone else will pay more for it. This is derisively referred to as "The greater fool theory". I believe bitcoins fit this description because it has no fundamental earnings power unless someone will pay more for it. If bitcoins were to stop trading, there are no assets to recover at all. It is interesting that there are over 10,000 different bitcoins out there.
For the last several years, companies have been IPO’ed that continue to show GAAP losses quarter after quarter, often those losses are not trending toward profitability. Management uses the magician’s trick to get the crowd to focus on something else like EBITDA. The problem with these firms is that if anything happens to reduce their revenues (recession, social change, etc.), the negative earnings grow. There have been a lot of these firms this year who have been cut to a fraction of their peak prices.
There is a reason why GAAP rules have been established. Up until the mid-1900's, there was very little established standards for accounting. This made it easy to "frame" the "accounting picture" that management wanted to project. It also invalidated the principles of good accounting, namely comparability and consistency.
So, stay safe and pay attention to the fundamental moorings of your investments. Just as in sports, fundamentals do matter.
Be smart, be well-read, be aware and be successful.
