Speculation & Margin of Safety Value Investing

  • The chart below shows that the market cap of firms trading at over 20x sales has hit $4.5 trillion
  • We believe this number likely understates the market cap sitting at these obscene multiples due to the massive amount of firms that are still held by private markets
  • Our prior chart of firms trading at over 10x price to sales featured the legendary quote by Sun Micro’s Scott McNealy who stated the 95% decline in stock price was all but inevitable

This chart is another example of the reckless speculation underway today. Please read on to see how these speculative 20x price-to-sales firms did post the dot.com bubble and how they look today.

Total Market Cap Stocks with P to S greater than 20x

If you are a KCR reader that means you understand the importance of valuation to the investment process.

Paying over 20x price to sales is, in our view, little more than the tacit admission that you are speculating. At that valuation you are typically betting something amazing is going to happen.

The human tendency to believe we can predict the future is an unfortunate one. We encourage readers to revisit our Quick Take on what we learned from Chapter 7 of Seth Klarman’s legendary book on margin of safety investing, or read some Warren Buffett or Benjamin Graham’s Intelligent Investor. In our view any source material is better than the media frenzy for the novel, new and cash flow impaired securities so popular among traders today.