A Stitch in Haste

My friend Steve Castellano has a post on his blog on Google stock, which may or may not be in a bubble. Some of his post might be too much for non-Wall Street types, but much of it isn’t:

Basically, there are 20 analysts trying to place a price target on Google, with targets ranging from $112-$225. Some are using PEG ratios, DCFs, EBITDA multiples, relative valuation to Amazon, Ebay and Yahoo. Meanwhile, Google executives are selling shares.
…
And extracting a target from a relative valuation exercise to companies like Ebay and Amazon does not make sense to me either. Ebay and Amazon are market places, while Google is a search engine that wants to be the online version of Microsoft (an online operating system and associated product suite). No one is comparing Microsoft to Ebay (that I’m aware of).
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Perhaps instead analysts should look at Microsoft’s peak enterprise value in early 2000 — a peak of general investor lunacy coupled with 10-year forecasts of Microsoft ruling the world.

Funny, I thought Wal-Mart was going to rule the world. Whatever.

I’ve not done any due diligence from which to form an opinion on Google’s share price, although the extended Blogger downtime yesterday certainly gives me an opinion of Google the company, if not Google the stock (Google owns Blogger).

Anyway, why is capitalism so great if it is, repeatedly, subject to “investor lunacy” such as what may be going on now with Google (or what happened to Netflix or Krispy Kreme or Sirius Satellite Radio or the whole NASDAQ Composite)? Every time there’s a market downturn or a burst bubble, anti-capitalists and nanny-staters jump at the chance to proclaim that capitalism “doesn’t work” or that the stock market is “too risky” and “rigged against the individual investor” and is nothing more than a “casino” (anyone remember Al Gore and his never-ending use of the term “risky scheme” regarding Social Security reform?).

Well, here’s why the stock market is so great: Because it’s voluntary!

If you doubt that Google is worth $180 per share, then don’t buy it. If you think stocks are a “risky scheme,” then put your money in something less risky, from corporate bonds down to a passbook savings account.

Now compare and contrast the alternative: When the government decides to commit capital (i.e., taxpayer dollars) to a venture such as, say, a football stadium or a passenger railroad, the risk remains but the voluntary nature of the project disappears. You are forced to “invest” in a New York Jets stadium or Amtrak or Wi-Fi networks or bodegas, regardless of whether you consider the plan a good idea or not, whether it’s a “risky scheme” or not, whether you will ever get a return on your investment or not.

This is somehow better than the stock market?

This phenomenon is even more obnoxious given the jingo that politicians tend to use when advocating public spending. We are “investing” in our children’s future or “investing” in the space program or “investing” in an industry by subsidizing it. Sure, just like I’m “investing” in dinner tonight or “investing” in a Dell 42″ flat-screen TV.

Words have meaning. “Invest” has a very specific meaning. If you buy Google at $180 because “it’s a hot stock,” then you’re not investing, you’re speculating. When the government subsidizes projects, regions or industries, it’s not investing, it’s redistributing.

Keep that in mind the next time you hear about how wisely the government is “investing” your tax dollars.

Related Posts:
Want to Learn Some Equity Research?
Taking Stock of Stock-Picking
Municipal Wi-Fi Update: Pennsylvania May Block Philly Plan
Sports Stadiums and the Pseudo-Economics of “Rooting”

(Cross-linked at Outside the Beltway.)

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