It's Not Wise to Bet Against Geniuses

 | Oct 31, 2013 | 10:00 AM EDT  | Comments
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aa

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yhoo

Let's go back in time about a year and try to remember why people were so bearish on Facebook (FB). I know -- people were bearish on the stock because more and more users were using the application on their mobile devices, and the idea was that Facebook wasn't going to be able to figure out how to place advertising on a phone.

I've been around for a while, and I have to say: That was the dumbest, most idiotic short idea I have ever heard in my entire life. Let me explain something to you. Not only is Mark Zuckerberg brilliant, having dreamed up the infinitely scalable computer program one night in his dorm room, but everyone who works for him is verifiably a genius. Facebook attracts the best and brightest engineers in the world. This makes me laugh every time I talk about it: So the thesis was that literally the smartest people in the entire world were not going to figure out how to put ads on a mobile phone. Seriously?

There certainly is something about this stock that people like to hate, whether it's the smug expression on Zuckerberg's face or his hooded sweatshirt or the roadshow for the initial public offering. But these are really bad reasons to initiate a short position in a stock. The fact is that Facebook has gone on to surpass all of the rosy revenue-growth models that surfaced when it was being taken public, and then some. Based on Wednesday night's earnings call, it doesn't look like the company is slowing down, either.

I caution you against shorting companies run by geniuses (I call them "gifted and talented camps") because the geniuses think much, much bigger than you and are 12 steps ahead of you in developing new revenue models. You might recall the early days of Google (GOOG), when we were asking ourselves why we were paying so much for a search-engine stock. As it turns out, the search engine is almost incidental to this company's real business, which is owning the entire gosh darn Internet -- which was a massive undertaking, involving the launch of satellites into space and hiring thousands of people to drive around in Google cars and take pictures of city streets. Almost 10 years later, people finally get the joke.

So what is Facebook going to be in 10 years? Beats the heck out of me. For now, it is a social network, and it is still in the process of maximizing the revenue from that particular business. In this, the company is doing a good job. But, after that mission is accomplished, the smartest people in the world don't then sit around and play Candy Crush. Instead, they find new ways to make money.

This is what growth investing is all about. Any loser can sit around and pick apart financial statements on a static basis and tell you the numbers don't make sense, but if you want a stock where the numbers make sense, go buy Alcoa (AA) or something like that. Growth investing is, in part, making a bet on the character and abilities of individual people. Buying Yahoo! (YHOO) on Marissa Mayer becoming CEO was one of the most obvious layup trades of all time.

It's an open secret that Facebook is losing some of its younger users. But first off, I don't care, because smart people there will figure it out. Second: That's what Instagram is for. Everyone who has ever shorted Marc Zuckerberg has lost, and lost big. You want to try it? Be my guest.

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