Am rereading the book Value Investing From Graham to Buffett and beyond written by Columbia university fame Bruce Greenwald and other co-authors. This book was written in 2001 and there is a chapter about Michael Price where he talks about General Electric company which in 2000 was valued at a eye-popping $570 Billion. You can see 2 pages below from the book where Michael Price was so short on GE considering their high valuations. The lifetime high of GE stock price was $56.68 made in year 2000 at a market cap of $570 Bn. Today the market cap of GE is $78 Bn and stock price is $8.98 which is a 1/7th of the highest price in 2000. So in the last 18 years, the once largest and most respected American multinational conglomerate has destroyed shareholder wealth by 7 times.
The book excerpt clearly indicates how bullish analysts gets carried away considering the “Too big to fail” mindset as well as recency bias when analyzing hot stocks of the time. High valuations of GE was conspicuous enough but still people get carried away with these hot stocks syndrome.
It had happened in 1970s with Nifty Fifty (reasons: too big to fail, assured earnings visibility) in US which had a similar fate of stock under-performances.
In July 2014, GE took the first major step in the process and offered 15 percent of Synchrony to the public through an IPO. This allowed GE to establish Synchrony as a separately traded stock and allowed Synchrony to raise capital to stand on its own. Although Synchrony is a great success as a business, GE degraded in value by multiple times.
Infact we might be still staring at some of the large US companies with high valuations in 2019 and investors can end up with similar fate. Lesson learnt a great company however respected need not be a great investment always. Margin of safety in valuation is the core when it comes to successful investing.