Two Margins

I got an email a few days ago about contributing1 to a startup called Two Margins. Two Margins is trying to reinvent the way financial documents are analyzed by crowdsourcing . You can log on and annotate the SEC filings as well as read/reply to notes others have written. I’ve now contributed to two different reports, the latest earnings from Apple and Facebook.

I would suggest signing up.2 It’s helpful to have a lot of different people giving their take on an earnings report and to be able to easily compare different perspectives. It also speeds up your research considerably if you don’t know much about the company in question.  Obviously, company executives don’t exactly rush to tell investors about all the potential long-term problems or major risks the company is facing, but you will see that information in the notes.

Now, I have only been using Two Margins a few days now, so I will hold off on providing a full review until later; I just wanted to mention it now in case anyone is interested3.

1 Full disclosure, I was offered compensation for contributing; however, I am not being paid to write this post.

2 I really mean it, I like what they are trying to do and I think it will be great for the service to grow. I also want to do my part to help startups with actual ideas grow. Yes, yes, I know, there are a ton of startups with great ideas; sadly, we get to read more about bullshit like Yo. For those of you lucky enough to not have been mentally scarred by that idiocy, Yo is an app that does only one thing, it sends the message "yo" to friends. That is all it does. Of course, an idea with that much potential obviously deserves $1.5 million in funding. What the hell is wrong with people2.1?

2.1 Of course, I mean people other than me.

3 I know that most of you think reading an earnings report is about as much fun as having your teeth pulled out. I find some parts of it to be interesting (depending on the company) so for me it's about as fun as watching paint dry. That said, it's important if you are thinking about investing in the company, so don't skip it.

Why you should avoid penny stocks

If you follow the financial news at all, you’ve likely already heard about the stock CYNK. If you haven’t heard about it, here is a quote from Bloomberg View author Matt Levine:

“I confess I had a feeling that not all was right with Cynk Technologies. Just a hunch that I had, that I mentioned repeatedly here and here and on Twitter and on television and to strangers on the subway. Something about a company with no revenues and a brilliant but undeveloped business model (buy friends on the Internet! friends not included) having a $4, 5, 6, whatever billion dollar market cap struck me as fishy.” – CYNK Makes the Case for Buying Friends, Naked Short Selling

I strongly suggest reading his article and I will note that he mentions that the SEC halted trading of CYNK shares (for obvious reasons). There has already been a lot of great discussion about CYNK and the scam (see The Epicurean Dealmaker) and I don’t have anything to add to the points that have already been made. However, for anyone not familiar with the stock market, here are a few tips:

  1. Penny stocks are ALWAYS a bad idea.
  2. Rule #1 is never wrong.
  3. Even if you find a case where rule #1 is wrong, stay the hell away from penny stocks anyway.
  4. If the investment were really as great as the pump-and-dump website you’re reading says, they wouldn’t be telling you.
  5. Investing is hard, you have my permission to punch anyone who tells you they can make you rich in a short time with very little work (not legal advice, my permission provides immunity from assault charges only where I have jurisdiction…).
  6. I know what you’re thinking: “the price is only $0.04 per share Robert, if it goes to $0.08 I will have doubled my money.” Mathematically true, but you are assuming that someone else is going to pay that much for the shares. Unless the underlying business has real value (and it would not likely be priced so low in that case) the only reason someone would pay $0.08 in the example above would be because they expect someone else to bid even higher. It’s a form of the greater fool theory. Do not ever try to time this, you really don’t want to hold the stock when the music stops.
  7. Before investing, at least take a look at the historical price chart. It should never look like this:

    5,460% return in one year IS too good to be true
    5,460% return in one year IS too good to be true

Just to put the last point in perspective, CYNK has a (paper) return of 5,460% between 6/30/2013 and 7/18/2014; just over a year. Apple (AAPL) has had a great run since 1/1/2000 with a total return of 2,557.31% (more than 14 years). Just something to think about.

The Future

In the case of the stock market we’ve now seen a 20+ year period where stocks are “overvalued” by several metrics (Shiller CAPE, Tobin’s Q, Market cap to GDP, etc).  So I think it’s worth asking yourself how useful all of these metrics really are.  Can you afford to go through a 20 year period relying on a rear view mirror dataset assuming that the market is overvalued when the other participants might not be using the same gauge of “beauty” as you are? -Cullen Roche

That’s a fair point, but in many ways it leaves me wondering what we have left. We cannot use the past to predict the future and any form of analysis you can do is taking some information from the past. The only way to know what will happen in advance is to possess non-public information. I think the solution to all of this is that you shouldn’t try to predict the future; rather, you want to manage your risk. Or at least, manage the risks you understand and accept those you cannot foresee.


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