Market (equity) prices are about feedback.
This is why the Soviet Union failed. Market (equity) prices provide feedback mechanisms needed to run a complex open society giving important market price signals for the efficient allocation of scarce resources. Don’t allow market pricing and transactions, humanoid existence wouldn’t evolve much from caves and bearskins.
Speaking of caves and bearskins, that’s how I would describe the current state of finance. Spend all the time in the world studying finance in textbooks, earn your MBA, spend countless hours doing your CFA, you will never be able to hear or decipher what the equity markets are communicating?
Professional fundamental equity (PFE) analysts insist on viewing the world with one eye. They assiduously work on a company’s financial statements – usually the ‘best in class’ type of companies – believing this will yield the Holy Grail, an appropriate albeit simplistic valuation metric that can be regressed to the rest of the companies in the industry. How does this group – PFE analysts – view the stock price of the firm? A relative measurement of fair value that fits into their make believe world of ‘Efficient Market Hypothesis’ (EMH). All of which leads to a world of ‘grey’ subjective reasoning, and nonsensical circular buy-sell-hold recommendations. No clear buy/sell decision points in this world.
Technical Analysts’ (TAs) have the same one eye view, just the opposite eye from the fundamental equity analysts. I would say they, as a group, are slightly more evolved than the PFE analysts. They are willing to concede, the obvious, that the current state of subjective fundamental equity analysis doesn’t work – in terms of overt money making anyway – and that higher or lower stock prices signal something is going on with the underlying fundamentals of the company that is a predictor of future stock prices. At least the investing world of the TAs is more objective. Price action is black and white and is never grey.
Each group, PFE Analysts and the TAs, have created their own cul-de-sac of educational and training institutions believing each is more superior to the other.
On rare occasions I have observed these two groups in a conference room together – very rare occurrence indeed. Each group giving their one eyed view on why the stock or market in question will go lower or higher is somewhat comical. Each believing their professional worlds and opinion is sounder than the other.
Use Two Eyes to Invest!
Here is a thought! Let’s open both eyes when it comes to investing. A Model Price Theory (MPT) user can use both a company’s stock price and fundamentals when evaluating a company for investment. By combining the two professions you get the best of both worlds. MPT users can see three dimensionally, yielding higher probabilities for profit and outcomes.
Each of these two professions will be the last to use MPT.
Why? Each professional group has spent too long learning there own witchcraft to give up these teachings for something new. For early adopters, like you, this gives us several years of profitable investing without these two professions giving us much notice (and possible criticism).
BlackBerry 2nd Quarter Results
Two important events occurred with BlackBerry. Did anyone notice?
Firstly, BlackBerry is now a software company. This is very important development in the company’s history. BlackBerry has lost multi billions manufacturing their own phones. In the last reported quarter, BlackBerry reported an additional loss of $1.6 billion on unsold phone inventory. This is now a thing of the past. Thank goodness.
Secondly, BlackBerry announced a write-down of $4.3 billion in assets from its balance sheet. ($2.7 billion of goodwill and a further $1.6 billion in inventory – as I noted previously.) This confirms why BlackBerry was trading below EBV-3 before Friday’s announced and that I have highlighted in my previous BlackBerry blog. (here) The market, through the share price of the company, was telling Model Price users that the stated asset values on BlackBerry’s balance sheet were overstated.
BlackBerry’s shares rocket 15% on the announcement
Surprised? Not me. Whether the shares were reacting to the announcement of BlackBerry giving up production of their own phones or management recognizing reality with the stated asset values on the company’s balance sheet, or a combination of both, this market reaction (feedback) is welcomed and signaling that BlackBerry is on the right track – at least initially.
New Model Price Chart
BlackBerry now has a new model price chart.
BlackBerry Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of BBRY subsequent to this post will be maintained on Facebook, here.
The most important observation, from my point of view, is that the market has finally made a connection to the balance sheet of the company. Notice the company now trades above EBV-3 (Blue line) and spiked almost up to EBV (Green Line) – our calculation of book value of the company. This is a big positive.
BlackBerry has started a new chapter in its’ company history. Mr. Chen, at least initially, has given markets a lot to cheer about that is critically important telltale whether BlackBerry is going to have a viable future. As I have said in my previous blog, whatever BlackBerry is paying Mr. Chen, the market has confirmed, again at least initially, to be a good deal for long suffering common shareholders.
We will see what the future holds for the new BlackBerry, but investors are now looking at a software company in the mobile space – the fastest growing category in technology – that’s trading under EBV or at the company’s stated accounting book value. In my opinion the market is giving investors a good deal.
As always we shall see what happens!