Facebook has once again beaten investor growth expectations however its stock plunge 7%. The reason reveals and is somehow important because it creates an opportunity for long-term investors.
After all, investors do not want to overpay for active managers who underperform. To wit and specify, Morningstar reported that investors pulled $139.5 billion from actively managed United States stock and bond funds in the first 11 months of 2015 while adding $361.8 billion to passively managed stock and bond funds.
Then again, there is a case to be made for not buying lottery tickets - oft-dubbed a hidden tax on the poor that siphons $50 billion from local businesses - or gambling at casinos - another regressive tax that makes casinos and local governments better off - but people do both.
The reason to buy individual stocks is that some of them go up faster than the market averages. The problem is figuring out which ones will do that and when to buy and sell those particular stocks to lock in those market-beating gains.
There is a very simple way to find the right companies and that is to look for companies that have gone public, achieved significant scale - revenues over $20 billion, keep growing at over 20% a year, and are still being run by their founders.
Can you think of any companies that pass these tests? Two come to mind - Amazon and Facebook - in which I have no financial interest. And the reason that these companies represent good long-term investments comes down to the talent of their CEOs.
Their ability to conceive of new business ideas that seize gigantic market opportunities, to turn those ideas into companies that grow to the point where they can go public, and to invest in new opportunities that sustain their high growth makes them the world's best capital allocators.
Join the Conversation