Value Investing Is Outdated, Here’s Why I Agree And What Has This Got To Do With Real Estate Part 2

This blog post is a continuation of part 1. If you haven’t read part 1 yet, please read that first. If you have done so, let’s go ahead and continue with the rest of this article.

Undervalued Does Not Mean It Has To Go Back Up

The stock market recently has been highly volatile. Concerns of a Ukraine invasion and a looming interest rate hike has spooked the market. Companies that reported earnings saw their prices skyrocket or tank like a piece of rock. One of them that did extremely poorly is Facebook which has lost about 38% of its value. Interestingly enough, before this collapse in price, Facebook was the most undervalued FAANG (Facebook, Apple, Amazon, Netflix, Google) stock if you were to use traditional valuation metrics to calculate its intrinsic value.

Facebook Was Undervalued Compared To Its FANG Peers At The Beginning Of The Year. But being undervalued does not mean it has to go up. Source: Google Finance

However, most people don’t realise that intrinsic value calculation is backwards-looking. Using past growth rates does not mean that the company is continuing to prosper in the future. As with all living organisms, a company has a limited lifespan and will ultimately die somewhere in the future. Just look at this report from JP Morgan, since the 1980s, 40% of all the Russell 3000 companies have suffered a catastrophic 70%+ decline from its peak. Many of them went bankrupt.

Most People Celebrate Their Profits. But Many Do Not Mention Their Catastrophic Losses. Source: J.P. Morgan

Hence, if you were to put together a portfolio of stocks, chances are 40% of your pickings will end up being a dud. And all these companies will have intrinsic values that seem attractive then. From my perspective, I see the same thing happening with Facebook. While most value investors love the low price it is trading now, I do have significant concerns with this company.

Company Name change

You don’t change your company’s name for no good reason. Except for a few monopolies that don’t even bother to advertise, most companies need to showcase their goods and services in the marketplace. The best way to do that is to create a brand or household name that everyone can remember. The name will instil loyalty and regular use among fans of the product. Changing that name would tell you that there might be something fundamentally wrong with the current product.

Fierce Competition Is Already Here

Facebook is not the only social media in the past. I’m sure you have heard of Myspace or even Google plus. However, how Facebook defers from these other platforms is Mark Zuckerberg relentless goal to maintain a monopoly in the social media space. Facebook goes about this by either acquiring the competition or engaging in an all-out war to destroy them. A firsthand account of how Mark Zuckerberg led a campaign against Google Plus can be seen through the eyes of Antonio Garcia Martinez, where he wrote about his experience in Chaos Monkey.

However, this time around, the competition is different. Tik Tok hails from China, and acquiring them is out of the question. Furthermore, Tik Tok is growing at a tremendous rate with a user engagement level higher than Instagram. With Generation Z absolutely in love with Tik Tok, Facebook might be starting to lose attention, which is the most valuable commodity in the social media space.

Before you invest, do you foresee the company taking over and maintaining its monopoly?

Into The Metaverse

Facebook engaging in the Metaverse is a great thing. The company is innovating and progressing forward to acquire other areas of revenue. However, who will win the Metaverse is still too early to tell. Companies such as Microsoft can be a severe threat to Facebook’s Metaverse domination. The tech giant is not purchasing a string of gaming studios just for fun. The overall picture tells me that Microsoft may be better positioned to dominate the Metaverse.

While Facebook shares may be ridiculously cheap and “undervalued” after this recent crash, remember that past earnings are directly proportional to its ability to maintain a monopoly over the social media space. Using that valuation to calculate future value would mean that you have assumed that the company can continue holding on to its monopoly. Of course, if Mark Zuckerberg did defeat everyone else in this Metaverse Fight, Meta would again regain the top spot in one of the world’s most valuable companies.

The financial data looks good with revenue and profits going in one direction. However, this is only provided the company can continue to maintain its current monopoly. Source: Google Finance.

Correlation to Real Estate And Property

Instead of picking individual stocks, one of the best ways to invest in the equity market is to buy an index fund. The index automatically curates the best companies and eliminates the poor performing ones. Most money managers and hedge funds never beat the index.

However, due to the overall quantum of real estate and tax laws in Singapore, it is improbable you can go ahead and manage a portfolio to manage this risk. As a result, you must do extreme due diligence in picking up the right property for your needs.

While most people consider real estate investments “safer” than the stock market, picking the wrong one is equally damaging as choosing the lousy stock from the Russell 3000. Properties purchases are primarily leveraged financial instruments. A drop in value of 25% will mean that your initial investment capital is 100% gone.

In my recent blog post, I have highlighted properties with demand characteristics that are both inelastic and elastic. Most consumers do not understand that “undervalued” properties with elastic demand may not be a good buy. These properties are what I refer to as higher-risk properties, where timing and other factors may play a much more critical role. You can make a killing or suffer significant losses. I will be writing about a tale of two condos in my next blog post so that you can understand this better. Meanwhile, stay safe and always do your homework!

Article contributed by Jerry Wong.

Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos and has been in real estate for ten years. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Book a video call appointment, and Jerry will share with you the following.

  1. How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
  2. Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
  3. Understanding your requirements and craft a solution for your real estate needs. Be it in asset progression, tax planning, financial calculations, rentals, sales, etc.

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