Never Ignore This Stock Risk
Everything — including once great investments — becomes obsolete eventually.
And examples of that in the past can help us predict when it’ll happen next.
As entrepreneurs, we need to stop looking at employees from an Industrial Age point of view. In the Industrial Age, employees were rewarded for things like seniority. In the Information Age, seniority can be death via obsolescence.
In the Industrial Age, a senior employee had more experience. In the Information Age, experience can be a liability. Don’t get me wrong, I still value that experience and need it to balance the views of younger employees.
But the challenges facing today’s entrepreneurs are: How do you attract, retain and motivate technologically savvy, cutting-edge employees? How do you keep wages and benefits in line with shrinking profit margins? How do you inspire employees to develop new products or services? How do you keep good employees from moving to other companies?
I do it by working more collaboratively with younger employees. I ask them to challenge my ideas — as well as their own. For example, the other day I mentioned to a group of younger managers that email was obsolete. They said I didn’t know what I was talking about. One called me an “old man.”
And what they said was true. The fact is, I don’t know what I’m talking about. I’m so obsolete that I don’t have an email address. All I know is that, one day, email will be obsolete, just as the idea of seniority is obsolete.
I was challenging younger employees to predict their future by predicting their own obsolescence. By taking the conversation into the future, it brings two generations together: old guys like me and the young leaders of tomorrow. By forecasting the future, I can share my experiences as they share theirs. When they tell me about using Zoom to speak to people all over the world, I see the bleak future for Industrial Age phone companies.
One of the things I’m doing is hiring younger, more tech-savvy team members and putting them on a quasi-board to advise my company about the future. This doesn’t mean I follow all their recommendations; it simply means that I need to listen to them and take appropriate action. I also listen with the intent of detecting core values and desires. On the flip side, I’m promoting older tech workers and asking them to be interpreters of the future.
One way to see the future is to see today as the past. In the Information Age, nothing is more dangerous than a person who doesn’t know his ideas are obsolete.
What Is Obsolescence Risk?
“The numbers tell a story,” my rich dad would say. “If you can learn to read financial statements, you can see what is happening within any company or investment.” My rich dad taught me how he used financial ratios to manage his businesses.
Whether it is an investment in the stock of a company or a purchase of real estate, I always analyze the financial statements. I can determine how profitable a business is, or how highly leveraged a business is, just by looking at its financial statements and calculating financial ratios.
For a real estate investment, I calculate what the cash-on-cash return will be, based on the amount of cash I need to spend for the down payment.
My rich dad taught me to always consider at least three years of ratios. The direction and trend of margin percentages, leverage, and returns on equity tell me a lot about a company and its management, and even its competitors.
Many published company reports do not include these ratios and indicators. A sophisticated investor learns to calculate these ratios (or hires someone knowledgeable to do so) when they aren’t provided.
A sophisticated investor understands the terminology of the ratios and can use the ratios in evaluating the investment. However, the ratios cannot be used in a vacuum. They are indicators of a company’s performance. They must be considered in conjunction with analysis of the overall business and industry. By comparing the ratios over at least three years as well as with other companies in the same industry, you can quickly determine the relative strength of the company.
For example, a company with excellent ratios over the last three years and strong profits could appear to be a sound investment.
However, after reviewing the industry, you may find out that the company’s main product has just been rendered obsolete by a new product introduced by the company’s main competitor. In this instance, a company with a history of strong performance may not be a wise investment due to its potential loss in market share.
For example, Blockbuster was a video rental company that declared bankruptcy and was then acquired for pennies on the dollar by a satellite broadcasting company. It was a victim of technological obsolescence. The advent of new technology made Blockbuster’s business model obsolete.
Some risks to investments are obsolescence risk, geographic risk, interest rate risk, political risk, longevity risk, and legislative risk.
But with the right education, you can navigate those waters successfully.
Prices Don’t Indicate Investment Quality
You’ve likely heard the adage, “You get what you pay for.” Well, it’s often true when it comes to investing.
Some naïve investors focus all their efforts on finding what they think are “affordable” stocks. But the price of a stock is only part of the story. As an investor, you always need to consider value. Price is what you pay… and value is what you receive.
For example, if you compare Apple and Blockbuster in 2010, Apple shares were trading at more than $300. Some people would say that such prices were far too expensive. They might think that a stock such as Blockbuster was far better because it was available for just six cents per share. They’d be right if they were just looking at the price. But fundamental analysis lets us consider value instead.
I can imagine them thinking, “Hey, it’s Blockbuster, it’s been around for a long time. I can’t believe its stock price is so cheap, I need to grab some while it’s so low. This thing has got to go up. What have I got to lose?”
Blockbuster has since gone bankrupt, providing us with another valuable investing lesson. People who fish for these penny stocks in hopes of netting a big winner often go home empty-handed. When you buy something with almost zero value, you are hoping against reason that it will pay off. However, this approach isn’t investing — it’s gambling.
And smart investors rarely gamble.
Editor, Rich Dad Poor Dad Daily