Stocks for the 'Too Hard' Pile

 | Sep 17, 2013 | 12:00 PM EDT
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I was visiting a client of mine a week ago, sitting in his office, and we were rapping about stocks, which I am reasonably good at. I've been in the business some time now, but he's been in the business even longer and has accumulated enough wisdom to know that you don't have to trade every stock just because you have an opinion. Going further, you don't even have to have an opinion on every stock. Safety first.

So we were talking about Amazon (AMZN), and for sure I have an opinion on Amazon, and my friend just shakes his head and says, "That one goes in the 'too hard' pile." I laughed, because that's the perfect description of that silly company. There are more disagreements on Amazon's valuation than on any other stock, with the possible exception of Tesla Motors (TSLA). If you want to start an argument at an idea dinner, say the word "Amazon."

For the record, I'm an Amazon bear, and I'm short the stock through options, and I have been for a while. Here's the short version of the bear case: Amazon doesn't make any money. It has made a negligible amount of money since it went public.

The bull case is obviously that Amazon has been grabbing market share for years and will continue to grab market share, and anyone familiar with stock valuation knows that there has to be some pot of gold at the end of the rainbow, some point at which Amazon raises prices, even a little, but I believe it won't -- ever. That's the dirty little secret of founder Jeff Bezos and Amazon, that there's no intent to make an accounting profit -- ever -- and as long as investors continue to reward "growth" -- there is no reason to. Bezos has amassed a $25 billion fortune running a company that has managed to make just a few billion dollars. I find this to be a very elaborate hoax, a mean trick played on us all.

But if I had my client's wisdom and experience, I wouldn't have put it in the "short" pile, I would have put it in the "too hard" pile instead, because how can you predict when the market will someday demand accounting profits? "Eventually" is not a good answer. It has taken 17 years already. It could easily take another 17. Switching sides and being long is equally dangerous, for reasons that should be obvious.

Every once in a while, you run across these hard-to-value stocks (Yelp (YELP) is another recent example), and unless you really understand the business, are truly intimately familiar with it and are comfortable with the bull (or bear) thesis, it is best to just stay away from it. Even better than making money is not losing money.

This is hard for people to understand, especially young people. Everyone goes through a phase, early on in their trading careers (myself included), where it is more important to be right than to make money, where you look at a stock like Yelp, you run some numbers, you say, "This just doesn't make any sense," you think you have identified a mispriced security, and short it. No. It goes in the "too hard" pile. For those of us old enough to have traded in the bubble, back in the late 1990s, the whole market belonged in the "too hard" pile, and there were a lot of smart investors who would have been well served to heed this advice.

The bearish argument often sounds smarter, and it usually is. It's seductive. But even legislators can vote "present" or not show up to vote at all. They're saving reputational capital, and you're saving actual capital, which is more important.

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