Minority Report

“Investing is the only sphere of life where victory, security and success goes to the minority and never to the majority.”

—John Maynard Keynes

In the movie, Minority Report, Tom Cruise plays a policeman in a world where crimes are predicted ahead of time. Cruise’s character gets accused of a future murder and he is forced to work incredibly hard to acquit himself of the anticipated crime.

Those of us who practice long-duration value investing disciplines must constantly examine securities pricing to determine where potential future investment “crimes” are being committed. There is a long history of momentum taking over in sectors or industries, and over-confidence often becomes attached to the momentum. In his book, John Neff On Investing, Neff points out the over-confidence in technology stemming (no pun intended) from the space race with the Soviet Union in the 1960s and the technology bubble which existed as he wrote the book in 1999.

We have developed a theoretical model at our firm for gauging the momentum and euphoria surrounding the most popular investments in the U.S. stock market. We call our concept “a well-known fact.” A well-known fact is a body of economic information which is “known” to pretty much everyone and has been acted on by almost everyone who has capital or borrowed money available.

It is our opinion that today’s well-known fact is tied to the faith the stock market has in the ability of technology companies to continue their amazing momentum. The easiest way to see this is the reaction to major announcements made by today’s euphoric darlings.

Netflix (NFLX) announced a $350 million five-year deal to engage hit-making producer, Ryan Murphy. In effect, Netflix eliminated the risks that Murphy would normally take to produce TV shows and movies. The knock-off effect of this is the depressed prices of traditional media companies whose profits and free-cash-flow dwarf the technology platform companies who have jumped into the entertainment production world.