Reading Tea Leaves
Say you're making your weekly visit to your favorite tea leaf consultant. She takes your money first, because… you never know. Then, she boils a pot and pours your tea.
You swirl and drink. When the cup is empty, she peers in, reading its mysteries.
"Oh!" She says, "when you return home, you'll face a journey abroad to prosperity and success."
You look in the cup. It's just some muddy leaves. But, "OK," you say "that sounds… great, thanks."
You leave and move on with your day, waiting for fortune to find you.
Was it a good telling? How can you know how good? What would you write in your Yelp! review?
Ideally, you'd want to test her tellings over time and see if they came true.
Outlook Hazy
Investing, a lot of times, can look like this. The value of any investment is how much it will profit in the future. Fortune telling.
So, investing in profitable companies is pretty important. They have to be profitable in the future too. The best bets for future profits are companies that make money today.
Sometimes though, companies that are profitable today stop doing that. And, every once in a while, companies that have been losing money do turn a profit tomorrow.
The C-suite chorus from every unprofitable company chants "we'll make money soon!"
This is the part where it can feel like visiting the Zoltar Speaks booth on the boardwalk.
Of course management would say that. Every incentive in the world is pressuring them to say exactly that. How can you know who to listen to?
Social Proof
SOFI, a member-based all-in-one financial services company, went public through a SPAC in late 2021. The company began by providing student loans to kids at high-caliber universities and has steadily expanded its product offering to personal loans, home loans, banking, credit cards and investment services. It's done this all while maintaining the high quality of its customers, who it lovingly calls "members."
Its go-public deal was arranged by Chamath Palihapitiya, who turned out to be a fortune taker more than fortune teller. He lost lots of investors lots of money in lots of his SPACs, but, probably, made money for himself. SPACs are a way to avoid some of the hassle of traditional IPOs, but mostly end up as a way investors in them avoid profit.
SOFI's stock went down too. And down. "We'll make money soon" management protested. But, burned investors moved on to other things.
Anthony Noto runs SOFI. He was the one making most of the protestations. Rather than traffic in tea leaves, though, Noto trafficked in dollars. Ones from his own pocket.
Almost from the jump, all the time he's been shouting "we'll be profitable soon," Noto has been dutifully buying up shares of the company he runs, the one he knows best, SOFI.
Managements almost always get paid a large amount in shares. They don't always buy shares with money from their own pocket. Noto has purchased shares 33 times for $14 million since SOFI debuted. About a third of the shares he owns, he paid for himself. He doesn't have to do this. It's a choice. His job is running SOFI. He's choosing to also be an investor.
Zoltar Speaks
Zoltar, says the same couple of things to everyone who puts coins in his booth. Managements can sound this way too when they get paid to say "we'll make money soon." You should always be skeptical. Their incentive is to say their company will do well.
Management's fortune tellings carry more weight, though, when they're backed by dollars. When managements back up their fortune tellings with dollars, you can use this as one signal to gauge how much conviction management has in its predictions.
SOFI finally became profitable in Q4 2023, just like Noto had been saying. It beat its guidance on a number of occasions and generally performed in-line with what he said it would do. Noto's purchases along the way have been a useful guide to where the shares have been headed. Especially for companies in doubtful situations, like going public via a SPAC, paying attention to management's extracurricular purchases can reveal whether their visions of the future are mirages or something more.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.