Forbes had an article today called “A Farewell to Borders.” It was a “border” line tearjerker for me because I have many fond memories of that place. During my college years, I spent countless hours at Borders meeting with classmates and hitting the textbooks. They always had plenty of big tables, bright lights, and good coffee. It was such a welcoming place – why’d they have to go and fail? Then again, of all the times I’d been there, I’m not sure I ever bought a book. Oh my, could it be? Was its failure due to the nature of its very own customers? Well, we can’t take all the blame. At the end of the day, management failed to recognize or act on structural changes impacting its business – aka Amazon, e-books, etc. Borders assumed that there was something special about the brick and mortar bookstore that could be not be replaced. Unfortunately, special doesn’t pay the bills.
Which brings me to my point. It does not matter how good, innovative, or revered a business is, it will not survive without sales, earnings, and positive cash flow. This is a fundamental truth that has always been true and will continue to be so forever. With that in mind, it’s practically amusing to watch things unfold in the world of social media today. It reminds me of the days when anything that ended in “.com” could attract endless investor dollars without having to show even a penny of earnings. It’s a crying shame to see that what passes for success today are “entrepreneurs” who can successfully pump and dump their startups without creating an iota of genuine value for shareholders or society. Beware of good ideas with bad intentions and negative cash flows looking to capitalize on unreasonable valuations. I think we all know how this will play out, “this time” is rarely ever really different (hat tips to Rogoff and Reinhart).
Victor K. Lai, CFA
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