Wednesday, May 11, 2011

"Keep Your Eye Clear, and Hit 'Em Where They Ain't"

Back in the early days of baseball there was an extraordinary hitter named William "Wee Willie" Keeler.

Playing in the years 1892 to 1910, mostly for the Baltimore Orioles, Wee Willie compiled quite a baseball career. According to Wikipedia:

{Keeler} compiled a .341 batting average over his career... He hit over .300 16 times in 19 seasons, and hit over .400 once. He twice led his league in batting average and three times in hits. Keeler had an amazing 206 singles during the 1898 season, a record that stood for more than 100 years until broken by Ichiro Suzuki.

Keeler reportedly said that the secret to hitting was to "hit 'em where they ain't"; that is, to hit the ball where the opposing fielders were not.

The analogy to investing, it seems to me, is that successful investing is also looking for areas that other investors are ignoring, and avoiding potential blocks to successful investment returns.

For example, I posted a note yesterday featuring Bill Miller of Legg Mason yesterday.

Mr.Miller noted that three sectors of the market - technology; healthcare; and financial - are trading at very inexpensive valuations relative to historic averages. For whatever reason, investors apparently are shunning these areas.

On the other hand, the commodity sector seems to be a very crowded trade; there is huge speculative and investor interest in commodities such as oil and gold.

Mr. Miller forecasts - and I agree - that history suggests that investing in sectors where there is already large investor and media attention will probably not yield good returns.

Today I would like to add another sector that seems overvalued: social media.

Exhibit A would be the upcoming IPO for LinkedIn.

I am a big fan of LinkedIn, and have found it a great way to get in touch with professional contacts.

But I would strongly advise anyone thinking of investing in LinkedIn cast a careful eye on the prospectus.

The LinkedIn indicative price range of $32 to $35 a share values it at between $3 bn and $3.3 bn - about 13 times last year's sales. You would have to assume very optimistic sales and earnings growth rates in order to have this valuation make sense.

Apparently even the offering prospectus notes that these assumption are aggressive.

Then there's this (quoting from this morning's Financial Times):

Potential shareholders should also remember that they are wanted only for their money. They can buy "class A" shares but 99.1 per cent of the voting power sits with "class B" shareholders, such as the founders and key executives.