Cover of MoneyWeek magazine issue no 710

Avoid the dinosaurs: Why smaller stocks are better bets

25 September 2014 / Issue 710

Investors put most of their cash into the big lumbering beasts of the business ecosystem. But they’re doomed to extinction, says Jonathan Compton. Read this week's cover story here.
PLUS:
• Is it time to scrap the Barnett formula?
• How to earn 6.5% a year on your cash
• The nerd who made $2.5bn from digital bricks

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Excerpt

Merryn Somerset WebbEDITOR'S LETTER

Merryn Somerset Webb

The bell that marks the top

No one rings a bell at the top. Instead you have to figure out for yourself when it is time to sit out an overvalued market and wait for a better time to buy. That’s what every fund manager will tell you. But it isn’t 100% true. In almost every collapse there is a bell of some kind. It’s just that most people are so caught up in the frenzy that they don’t hear it. That might be the case today.

In this issue you can read some of the story of the flotation of Chinese e-commerce giant Alibaba. Some think its growth potential is such that a price/earnings ratio of 61 times offers good value. David Stockman (who we interviewed back in 2013) isn’t one of them. According to the author of The Great Deformation: The Corruption of Capital in America, Alibaba doesn’t offer any hint of a sustainable business model to its bubble-drunk investors.

Instead it is “a purely derivative mass merchant of e-commerce… rolled into a convoluted financial pyramid that would have made Goldman Sachs’ ill-fated schemes of 1929 look reasonable”. It has no “inventories, no stores, no warehouses, no patents, no state monopoly and virtually no fixed assets or working capital”. It just isn’t worth $230bn, or anything like it. So why does anyone think it is? Why did Wall Street chuck so much money at an over-priced “mass merchant operating in a precarious economy”? Because “Wall Street is a momentum-driven casino that is now over-valuing everything that moves”.

This sounds like an extreme view. But almost every indicator you look at says something isn’t quite right in the US stockmarket.

• Read the full editor’s letter here: The bell that marks the top