Interval Training

Stress plus rest equals growth.

Facebook stock price. Source: Bloomberg app.

That’s what I thought about when I heard the latest Facebook numbers. Stock analysts saw them as an unmitigated disaster: year-over-year revenues were “only” up 42%, after growing 60% just a couple years ago. But more important was the fact that expenses were up 50% and accelerating. Wall Street said to Facebook’s management, “You can’t keep doing this.” No one can grow expenses faster than revenues indefinitely; eventually they run out of margin.

Source: Stratechery

Wall street acted like the parents of a college kid who’s spending is out of control: they took away the credit card, or at least one of the credit cards. Facebook’s market capitalization fell by almost $120 billion last Thursday, the biggest drop for any company since Intel’s $90 billion drop 18 years ago.

Some folks see this as the beginning of the end for Facebook. The tallest tree in the forest is the most likely to fall in a storm, and an unsustainable trend in revenues, expenses, and profit margin is proof that the Zuckerberg era is over. In this view, the company needs adult supervision: serious, seasoned management.

But a lot of great firms have gone through rough spots and then gone on to new highs. Apple’s value declined by $60 billion in one day just five years ago. This was part of a negative trend in the stock price, which fell almost in half between September 2012 and April 2013. Steve Jobs was gone, and it wasn’t clear that the new CEO, Tim Cook, could be as effective. Amazon’s stock fell 95% during the tech crunch. People forget these things.

Amazon stock price during the tech crunch. Source: Bloomberg.

But pain – in all its forms – is a signal that we need to find solutions. There’s an adage that says if you’re not failing, you’re not pushing the limits. Sometimes when we push, we break through and we can celebrate. Sometimes, on the other hand, we fail, and we need to reflect on what needs to change. That reflection – when we’re given a choice between an ugly truth and a beautiful delusion – is where we choose the path of interval training or an easy chair.

A friend once told me that there are three types of people: those who make things happen, those who watch things happen, and those who ask, “What happened?” I’m not endorsing Facebook’s business model or stock price or predicting which path they’ll take: progress or stagnation. But billionaire Ray Dalio started his career by punching his boss in the face and then almost going bankrupt. He learned from his mistakes and went on to build the biggest hedge fund in the world.

Life is about what we do in the painful moments: the choices we make, the paths we choose. It’s important to choose wisely.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-08-03T08:19:09-04:00August 3rd, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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