Around six weeks ago, WeWork was looking to go public with a $47 billion valuation. Investors started to ask all the right questions such as, “Why would pay this much for a company with no profits?”
From there things went south quickly. I remember reading a story at FinCon on Sept. 5th that they lowered the valuation to $20 billion:
Who cares about $27 billion? It's a round-off error. https://t.co/kWJKujcJ1Y
— LazyManAndMoney (@LazyManAndMoney) September 6, 2019
It seems that people did care about that $27 billion dollars change. Journalists did more research and dug up new information. The founder-CEO found himself in trouble and was ousted by the company.
The entity with perhaps the most informed knowledge of WeWork is a company called Softbank, one of their investors. Yesterday, SoftBank decided WeWork was worth $8 billion dollars. They invested $5 billion to bring their total to around 80% of the company. It’s been reported that without that money the company would be out of money next week.
One way to look at it is that everyone involved tried to scam the public into paying $47 billion for something they deemed worth only $8 billion. There may be other ways to look at it, but they currently escape me. In my opinion, a company without profits, money, and a lot of debt on the books certainly shouldn’t have been worth billions.
The ousted CEO walked away a billionaire. Imagine being so spectacularly rewarded for such spectacular failure. Yet, that’s the crazy CEO-world we live in.
It’s this kind of thing that makes me value the company that I bought into a lot more.
What Does WeWork Mean to You?
Right now you may be thinking, “Cool story, bro. Why should I care?”
Investing in individual stocks is tricky. I experienced this first-hand this morning. I’ve had a lot of Twitter stock that I have held since it was very cheap. I had been slowly selling off a little of it, but it’s still more of my portfolio than it should be. Today, Twitter announced poor earnings and it lost 20% of its value. I’m trying not to care too much, because it is still worth double what I paid for it… and I locked in some gains with the sales I did make. Still, it doesn’t feel good.
At least Twitter is profitable and a household brand.
It seems like WeWork was just picking a number out of a hat for its valuation. When investors didn’t like the first number picked, they tried again. If WeWork had showed solid profits, we could have skipped the guessing games. If you are going to invest in individual companies with no profits, this is something to consider.
The best way to avoid this altogether is to invest in many companies through a mutual fund or ETF. Due to the diversity of the companies, they are much safer than depending on one company.
This is one time when I suggest the smart move is to do one thing, and I personally do another thing. Part of that is because I’ve actually done well with picking individual stocks. It’s quite possible that I’ve been more lucky than good. (Also, I tend to wait until a company has dropped a ton before I buy.)
When I do pick individual stocks, I am mindful about keeping 90% of my portfolio in index funds. Thus these small picks, whether they win big or lose big, won’t move the needle too much my portfolio. You could fairly ask why I do it all. If you did, I wouldn’t have a very good answer for you.
Since I’m old, I lived through the tech boom/bust. Guys were buying stocks every day that went up double digit percentages per day. I was uncomfortable until my Morgan Stanley broker told me to “ignore P/E, we only care about FP/E(future PE). Most of those stocks ended up at nothing. My favorite was JDSU, which I bought in the $120s and watched it fall to zero value. One main thing I learned was to not take financial advice from someone who had not lived through a downturn.
I remember that. I was going to mention WebVan and Enron, but then I thought I would have counter with “Amazon.org” as my roommates used to call that profitless online bookstore.
Can you very easily get a monthly income of $40 with index funds? I never invested in this, just curious
Well, a monthly income of $40 is an annual income of $480. Many index funds pay dividends which can range from 2% to around 5-6% (some REITs). That means that if you invest roughly $10,000 and get around a 5% dividend yield, you’d get around $500. If you get a 2.5% dividend, you’d have to invest $20,000. You may have to pay taxes on those numbers.