Today’s Profit Watch calls upon the wisdom of the ancient Stoics to navigate today’s market.
We’re branching out temporarily into philosophy instead of economics.
What hope do the Romans and Greeks of yesteryear have of shedding light on today’s stock moves?
I say a lot. Why? Perhaps you already guessed.
Because human nature does not change.
We may not wear togas anymore. But we’re all still keen to make money while doing as little as possible to earn it. That was as true in the time of the Greek agora as it is now.
What am I jabbering on about? I’m seeing a lot of speculative run-ups happening on the ASX. These moves can be very profitable if you can catch them.
But don’t fool yourself into thinking they are always appropriate to hold for the long term.
Many will fizzle out once the hot air is punched out of them. I know. They’ve fizzled out on me in the past.
Today’s piece highlights one potential red flag on the market right now…
I happened to come across a stock called Netlinkz [ASX:NET] recently.
It’s enjoyed a terrific run this year.
It was 3 cents at the beginning of the year. It hit as high as 30 cents on 11 July.
Here’s a warning. This is not a business I’ve followed closely.
But a friend of mine mentioned it at the gym the other day. A friend of his seemed to think it was a good idea.
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I dug into some of its recent announcements.
It’s a perfect example of how confounding the share market can be sometimes.
You would be staggered to see such a run based off the company’s revenue alone.
In the last three quarters, the company has generated just under $180,000 in sales and spent nearly $4 million in operating cash flow.
That’s not a sustainable dynamic over the long term, of course. But often stocks enjoy a good lift from good announcements — a topic we’ve covered this week.
But the main point for today is that the rise in the Netlinkz price means it now has a market cap of over $300 million.
Look at how the stock has run up this year…
A market cap of over $300 million seems very hefty to me.
That puts a huge expectation on the stock to deliver on that current valuation. I’d be very wary of buying at this level — no matter how compelling the outlook may appear.
I’m not being cynical about this. It may well do so — I haven’t studied the business well enough to say otherwise.
Gym tips and rank punts
But I bring it up because of my friend at the gym. I suggest his judgement got the better of him.
He ploughed some of his money into this without really knowing much about it. It sounded like a reasonably large sum, too.
He blabbed on a bit about being in it ‘for the long term’. That can be a dangerous idea in the stock market.
That brings me back to our ancient friends, the Stoics. Apparently, they have a mental technique known as ‘negative visualisation’.
The idea here is to take a scenario and imagine the worst possible outcome.
The Stoics thought this was a good way to appreciate what you do have in life.
You may think your house is not as attractive and well-furnished as those on The Block, for example.
The Stoics would urge you to imagine it burning down and you sleeping rough on the street near the ruins.
Doesn’t seem so bad having a roof — modest though it may be — over your head now, does it?
I think we can apply this idea to our stocks.
Marcus Aurelius: ASX consultant?
My friend may be ‘right’ about Netlinkz. It may turn out to be a great buy at this level. But I urge him to imagine the worst-case scenario here too.
The Stoics would say a stock with a very high valuation and modest revenue that doesn’t cover its operating expenses can go all the way to zero — the worst possible outcome.
So it behoves the modern philosopher to the next line of reasoning: It’s best not to have a big position in such a stock or a stop loss in place should the worst become more likely rather than less.
Famous short seller Jim Chanos was once asked about the risk of betting against stocks rising — as a short seller does every time they take a position.
He said he’d seen a lot more stocks go to zero than to the Moon.
Perhaps he has something of a Stoic about him.
Now, you won’t find stock advice in the book of Meditations — the Roman philosopher-king Marcus Aurelius penned as Emperor of Rome.
But if he had done, I imagine he would have said that it’s fine to take a speculative position in the market — as long as you have some idea of what you’re going to do if it goes against you.
Consider it a word from the ancient wise.
PS: Don’t forget to click here for more stock market insights from Profit Watch Analyst Jonathan Evans…