Cuban’s headline is misleading, but timely, so it worked.
The Nasdaq broke through 5k this week. That’s a great headline for clicks.
But, if you really listen to what Cuban is saying, his headline has very little to do with the point he is making, which is a good one.
There are great lessons in this post and the conversations surrounding it but we’re getting bogged down on the wrong thing.
First off….when we hear the word “bubble” we think of two things 1) asset prices moving ahead of underlying fundamentals and 2) the general public involved in an asset class/investment that is beyond their level of understanding, it blows up, and takes the individual investors and economy down with it.
If you listen to what Cuban says and read his article, he is loosely talking about the second point. But the bubble he is referring to is not tied to prices, it’s tied to illiquidity.
Also, he openly says he doesn’t think lack of liquidity will take down the entire economy, so his headline is really pretty bogus if we’re talking about the traditional “bubble” term that makes everyone pee their pants and start selling all their baseball cards.
All he is saying is that if tech companies are banking on the ability to either go public or selling to a larger company, they are DOA if those are their only two strategies to pay back investors. He’s suggesting that a lot of them will be hung out to try unless they have plants to money for their investors (and drive up the stock price) without an IPO.
Why is an IPO off the table for most? He says that unlike 2000, the SEC is not supporting small initial public offerings. So as an early stage investor surfing the crowd funding sites in your chonies from your parents den, without the option to easily take a company public and offer the stock to the masses (like in 2000 he says), there is much less liquidity for you as an investor to sell your stock if you need your money back. And then you’re dead.
So, if you’re throwing 5k around on these crowd funding sites (where Cuban suggests there is a ton of illiquidity that the average investor is not aware of), what is the question Cuban says you should be asking a company before investing?
Cuban told CNBC: ask how you can get your money back. If they say when we sell the company, don’t make the investment.
For the average investor, an IPO or selling the company can’t be their only game in town as their way to pay you back. That’s all he’s saying. Of course we know those two strategies are the ways to hit home runs, but those are few and far between for the average investor. Mostly because you invest in like three companies when the big guys are investing in 50, so their odds are way better than yours.
Private investments are PRIVATE. That means illiquid and long-term investments. High risk and high reward.