Shares soar, euro saved, Facebook flops

July 30, 2012, 12:16 pm Bruce Jackson Yahoo!7

Back off all you doomsayers. The end of the financial world has been greatly exaggerated.

Long live the euro.

Long live equities.

Long live Europe Central Bank head Mario Draghi.

In the words of Treasurer Wayne Swan, back off all you "doomsayers and rentseekers". The end of the financial world has been greatly exaggerated.

Last week, the Dow closed above 13,000, in the process capping its biggest two-day jump since December, after the aforementioned Mr Draghi pledged to save the euro at all costs.

Phew.

We’re not ones for getting into the details of how, why and when the euro might be saved. We’ll happily leave that for the politicians and economists to debate...knowing full well most predictions will be wrong, there will missteps along the way, doubts will resurface, volatility will spike, and it will rain during the London Olympics.

Call us ignorant, call us naïve or call us plain fools, but we simply don’t see the value in worrying about things over which no-one knows the answer, and anyway, are totally out of our control.

Yes dear Fools, we’re unashamed optimists. But we’re realistic. We realise these are tough times, both economically and for wearied and bloodied stock market investors.

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Speaking of bloodied, Facebook's (Nasdaq: FB) stock crashed 18% after the social networking giant reported its first ever results as a public company.

Facebook shares trade below $24. Since going public two months ago at $38 a share, Facebook shares have lost 37% of their value. The lesson of the day? It's hard to pick just one!

In the words of the 1980s song, don't believe the hype. Facebook's IPO was so ridiculously hyped that it would have taken a herculean task to justify the price.

The other thing that stands out is that a wonderful product doesn't always make a wonderful business, and a wonderful business doesn't always make a wonderful investment.

Air travel is a boon for travellers, but a tragedy for investors. Facebook shares - at the IPO price at least - look like they might have taken a few investors for a ride.

You’ve never heard of this multi-millionaire

With the ASX/S&P 200 down 35% over the last 5 years, and with seemingly no catalyst to send shares higher, many have given up on stocks completely.

It’s natural for humans to assume the experiences of the recent past will continue long into the future.

Shelby Davis is one of the most successful investors ever, turning $50,000 into $900 million.

In the excellent book The Davis Dynasty, author John Rothschild the 10 basic tenets of the ‘Davis Strategy’.

Lesson number 9 is worth recounting here...

"Ignore the rear-view mirror"

You couldn’t drive to work or to the shops focusing on the rear-view mirror. You might make it to the end of a very straight and wide street, but driving -- like investing -- is full of twists and turns.

Focus on the past...at your peril

Davis’ warning has two applications.

First, like the proverbial generals who are always ready to fight the last war, human nature leads us to invest based on what worked (or avoid the things that didn’t) in the most recent past.

We’re risk averse when we should be recognising bargains, and we lose our heads just as the clock is about to strike midnight.

Seeing your investment portfolio turn into a pumpkin is to be avoided at all costs.

The second application of Davis’ lesson is ever more important as we rush headlong through the information age. Davis’ son (also confusingly named Shelby) characterised it thus: “Computers and their endless databases cause investors to focus on the past”.

Data is comfortable. We calculate half a dozen ratios and feel our comfort level rise with each new number. We look up a low historical P/E and reassure ourselves we have a bargain.

By all means, use the past to evaluate the attractiveness of an industry, the competence of management and the company’s suppliers, competitors and customers.

$900 million reasons to stay the course

But Fools, rely on extrapolating that experience at your peril. As they say, the trend is your friend... until the end!

By the way, Davis’ 10th lesson is ‘stay the course’. Davis gives us 900 million reasons to believe he’s right (and Warren Buffett’s US$44 billion fortune gives us 44 billion more).

Stay the course. Stay Foolish!

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The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).

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