There was a great company that Forbes once proclaimed it the fastest-growing company in history. Google had offered $6 Billion to buyout this company in 2010 but they spurned down the offer and decided to continue alone. The company am talking about is Groupon, once a global leader in ‘Daily deals’ touted to have access to 150 Million customers a decade ago. A year later after turning down Google`s buyout offer, Groupon did then second biggest Internet IPO in US (after Google in 2004) listing at a nosebleed valuation of $13 billion in 2011 (twice the valuation Google offered in 2010). It was not even a bull market in 2010-11 and stocks were trading at low valuations in general.
Groupon was growing at an astounding rate. In 2010, it’s revenues grew by 22,000 % to $713 million. And in the first quarter of 2011 (IPO year) alone, it nearly matched all of its revenue from previous year with $644 million in sales, up 13,575 percent from a year ago. The annualized annual run rate was around $3bn in 2011 which appeared to be sustainable for next 5-6 years at that point of time. Gross profits were up about 24,600 % in 2010 to $280 million, from $10.9 million the year before. But they were burning cash every year at the rate of around $500 million and the company management was completely focused on Growth during that time. Any investor who heard about the success of Internet companies like Amazon, Google would have been tempted to pounce on this fastest growing IPO in 2011.
Competitors soon nipped at its heels, results started to falter, company fired their CEO, did a lot of restructuring but never came back to its glory days of growth again. The stock which started at $13 Billion valuation in 2011 has been decimated to a mere $215 Million losing 98% of its value. If an investor had put $10,000 in Groupon stock during IPO will be left with just $165 after holding a decade. Buy and hold for long period would have obiliterated its investors.
Now take the recent example of Meta (Facebook) stock, another legendary hailed company touted to have 3 billion users, strong Moat of network effects, strong social media brands like Instagram, Facebook, Whatsapp. If an investor had bought the stock during May 2012 IPO at a price of $38/share, would have just multiplied the capital by 3 times over last 10 years. That’s a meager 11% compounding on par with S&P 500 index which also multiplied by 3 times over last 10 years. Facebook stock has underperformed Nasdaq index which has multiplied by 4 times over last 10 years.
I can go on with hundred more examples like Alibaba in China, Paytm in India and so on. 10 years down the line, we will be talking about Tesla probably as one such example.
Now let me get to the core topic of today, “Why investing is so hard for common investors? Why are less than just 0.1% of the investors successful in stock markets?” Anyone who is given the great fundamental growth stories of Groupon, Facebook would have been impressed to invest in these companies during IPO. Valuation was expensive but not to the extent to be decimated this levels. What really happened was the business fundamental deterioration to such levels that growth has slowed down like anything.
Where most investors usually falter is entering the stocks at high valuations during bull markets. But there are investors who falter by investing in great businesses a point in time, only to see their returns being wiped away. Investing is really hard but most of the people think that anyone can do this due to the ease with which they can buy or sell stocks on information or news on TV channels.
Investing is no easy way to build wealth. If there were, everyone would already be rich. Let me end this week`s letter with a quote from legendary investor Charlie Munger about Investing and getting rich: “It’s not supposed to be easy. Anyone who finds it easy is stupid.” There are no shortcuts. Period.