A Severe Stock Market Correction Is Coming

Venture Capitalist

One need look no further than the current business environment to realize that a major correction is coming.  The way companies are valued today has no basis in reality.

The stock market has always been a measure of business confidence. Evaluating companies and speculating about where they will be financially 6 months or a year down the road is what has driven the market since its beginning.  However, those measures have always been based on revenues, PE ratios, inventory levels, interest rates, employment, consumer confidence and so on.  And while it’s true those measures are still relevant today, the valuations of many of our newest and largest companies are fantasy; Apple being one of the few exceptions.

Years ago Dot Com Businesses drove the market.  We all know how that turned out.  Today they refer to new companies as Startups.  No one knows which or any of these will be successful but the very fact that there’s a chance that one might be the next Facebook, LinkedIn or Twitter, is enough to drive the stocks prices of these unknown companies. Part of the reason for this is that we are in unchartered territory.  No one really knows where this social media/technology experiment will end up.  It’s growing and changing rapidly.  Will Facebook exist in 10 or 15 years?  These companies are about hope but hope is not a business model.  Facebook certainly recognizes this which is why it keeps buying companies.  It’s an effort to figure out the unknown before IT becomes irrelevant.  It’s literally a race against the clock.  No one needs Facebook.  It can be replaced if and when someone devises something better.  That’s one of the toughest things in this new world, evolve or die.  Or worse yet, evolve or become irrelevant.

Let’s address this overstated notion of followers or visitors.  The number of followers a company has, is completely irrelevant, (other than it being an ego thing), unless a company can monetize those visitors. Who cares how many non-paying visitors or followers you have?  It means something to advertisers, which is how the majority of their income is earned.  But that’s not a good, long-term business model.  Advertisers fork up far fewer dollars on line than they do for a television commercial or full-page ad in the New York Times.  With a million plus apps and many millions of websites and growing, getting noticed is no different than the proverbial finding a needle in a haystack.

Most importantly however, and the real reason that a collapse is near, is that companies are being valued based on their ability to raise capital.  So for example, if company A borrows 300 million dollars, the company is valued at 10 billion dollars.  Even if it doesn’t generate nearly that much revenue and loses hundred of millions of dollars.  Speculation is everything!  Venture capitalists are now controlling the market and that’s the same thing as building a house without a foundation.  Eventually, it collapses.  Unless a company generates a profit, capital quickly evaporates and the company is back to square one seeking new sources of capital.  It’s truly insane.  If your parents give you 10 thousand dollars but you have no way of growing that money, you simply use it to fund your lifestyle, in 6 months, you’ll need to borrow more money from mommy and daddy.  Your net worth didn’t increase it just bought you some time.  It’s no different than a heroin fix to a junkie.  This must be controlled, before it’s too late.  There are a few, mostly young people, getting rich quickly, so be damned to everyone else once the collapse comes but it’s bad for the U.S.A.  And while I’m not a fan of government intervention, there must be rules on valuations in this new world of Startups.

One might say this new world is what’s driving innovation and to that I say nonsense.  Research and development with a concrete business plan is what drives innovation.   Throwing darts at a dartboard and hoping for a bull’s-eye is not a plan.  This should be as clear as a clear night in the desert of Arizona but will anyone see it and demand change before it’s too late?  How can we be here so soon after the 2008 collapse?  What worse is despite what the numbers say, the economy is still very fragile, (with interest rates still at record lows) a correction at this time might cause irreparable damage.  Unless we change course it’s not a matter of if but when!!!

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