Understand What You Know and Separate it from Speculation. That is the mantra of the value investor in chapter 1, a principle invoked throughout the book. Value investing is about challenging the speculation in market prices and later chapters show how to do this effectively by accounting for “what you know” and comparing that accounting to the speculation in market prices.
Here is an exhibit for speculation: MicroStrategy Incorporated (MSTR)
MicroStrategy provides AI-powered enterprise analytics and software and encourages the use of Bitcoin. It holds a large stock of Bitcoin. On the day in December 2024 when Bitcoin reached the $100,000 price, the firm’s Bitcoin holding was valued at $40 billion and the firm’s equity market value stood at over twice that at $90.5 billion. For 2024, the stock price was up 512%. Now there’s a great investment?!
Beware: This looks like speculative pricing. Another value investing principle: Anchor a Valuation on What You Know. For the nine months to September 2024, MicroStrategy reported revenue of only $342.8 thousand, down from the same period in 2023, with a net loss of $495.9 thousand. Cash flow from operations was also negative. Further, MicroStrategy levers its Bitcoin purchases with convertible debt. If speculative Bitcoin prices decline and trades unwind, the picture will not be pretty. Buying speculation is risky: Bitcoin prices tumbled 75% in 2022.
