This week I’ll shift away from the cognitive biases and irrational behavior that affect our decision-making, and instead shift my focus towards one of the most important aspects of investing: portfolio theory. Modern portfolio theory (MPT) focuses on building a portfolio of assets that maximizes the risk-adjusted return—that is, maximizes the expected return of an investment portfolio while minimizing its risk (learn more about how to avoid risk here).
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When Ignorance Supersedes Success
In last week’s article, The Ghost of Snapchat, I detailed how Snapchat CEO Evan Spiegel made a $3 billion dollar mistake by rejecting Mark Zuckerberg's buyout offer. The pending release of “Slingshot,” Facebook’s (FB) version of the Snapchat application, combined with the company's massive user base, displays how Snapchat’s monopoly over “disappearing” photo-sharing services is on the decline.
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The $5 Billion Mistake
Last week, social media website Pinterest announced it had raised $200 million in new funding. These new monies increased Pinterest’s valuation from the $3.8 Billion mark, reported in October of 2013, to $5 Billion. But, is the company actually worth this much, or is this simply another ridiculous Silicon Valley appraisal (read more about what drives irrational investing here)?
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Filthy Rich
Yesterday, the former CEO of Microsoft (MSFT), Steve Ballmer, announced his intention to buy the Los Angeles Clippers from the embattled Sterlings for $2 billion. While the deal is by no means final, according to the LA Times, it appears likely to go through. Furthermore, although this is big news, the funding behind Ballmer’s acquisition of the Clippers is even more intriguing (and raises serious questions about Microsoft’s executive pay plan).
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The Internet Of Everything
Last week, tech giant Cisco (CSCO) beat quarterly revenue estimates by $120 million and beat earnings guidance by $.03. Cisco issued its results in the late hours of May 14th, prompting an after-hours trading surge of Cisco stock. After closing at around $22.80 per share, Cisco opened on May 15th at over $24 and is now priced at $24.82. Additionally, Deutsche Bank upgraded Cisco to a “buy” rating, with a price target of $30.
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The Ghost Of Snapchat
In November of last year, Snapchat, the popular “disappearing” photo-sharing app, turned down a $3 billion all-cash buyout offer from Mark Zuckerberg’s Facebook (FB). Evan Spiegel, the CEO of Snapchat who would have personally received about $750 million from Facebook, inexplicably stated, “I think trading for some short-term gain isn’t very interesting.”
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The $50 Billion Acquisition
Last week, AT&T (T), the second largest wireless provider in America, announced its intent to purchase satellite television provider DirecTV (DTV) for $50 Billion. The takeover will allow AT&T to bundle more television, mobile, and Internet plans while improving the quality of its overall services. By acquiring DirecTV, AT&T will now serve more than 26 million video users in the United States.
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