Focus on Pets, but Avoid the Dogs

What are investors to do when stock valuation becomes increasingly difficult? Facebook (Nasdaq: FB)'s initial public offering demonstrates that an opacity ethic -- compounded by blatant and routine withholding of information -- corrupts any trust in fundamental data.

Compounding the difficulty, we simply don't have enough history in the tech arena to make a reliable case-by-case determination of what it means to have paltry revenues. Sometimes, it's an early investor opportunity, other times, a harbinger of fluff.

To execute a market timing strategy in this environment is extraordinarily tricky, which ultimately ups the ante on coming to terms with value. A deeper, more significant investigation into value means honing investor intuition, with "intuition" defined as an ability to read the tea leaves by dissecting human motivation like a behavioral economist.

John Maynard Keyes, passé economist du jour but one of the most successful investors of all time, linked intuition to his concept of animal spirits. Animal spirits were indicative of what was happening below the surface, in the realm of basic human instinct, on the bottom of Maslow's pyramid. I will delve further into Keynes's strategies in another post, but for the purpose of this analysis, it's sufficient to say that Keynes could identify value -- picking his investment "pets" carefully and sticking with them -- ultimately beating the UK stock market (1924-1946) by an average of eight annual percentage points.

I might suggest that in identifying a person's metaphorical "pets," we not only gain relevant insight, but we also unearth inconsistencies and disrobe the superficial.

If we are lucky enough to find the founders of companies who truly value as beloved "pets" the creation that they are hawking to the public, we are on the right track. We are really on to something when we discover that the founders, as well as the key stakeholders and investors, are avid users of a product or service, employing it in the particular way that justifies its extolled virtues. In contrast, ask yourself: Did Solyndra executives power their own houses with solar energy?

Zuckerberg's Beast

For the most prominent contemporary example, we can look at Mark Zuckerberg's Facebook pages. There are pets all right, with the one garnering the lion's share of face time being Beast, the darling Puli puppy. I can't deny that looking at the puppy pictures has been one of the more satisfying experiences that I have had while perusing Facebook. Nevertheless, this has little to do with what Facebook COO Sheryl Sandberg told The Economist in late 2011, namely, that Facebook's legacy will be sharing that evolves into caring.

Caring with authenticity, rather than sharing just because, would require Beast to have purposeful social connections... a tie to Shelter Me, for example. This is not to minimize Mark Zuckerberg's caring, as demonstrated by his $100 million gift in September 2011 to the Newark school system. Nevertheless, this charitable act had no roots, no direct or recognizable correlation or execution tied to the Facebook platform or technology itself.

This dichotomy is important because it shows the lack of consistency between what is said and what is done. Even more important, it provides key insight into why many harbor a passive-aggressive dislike of both Mark Zuckerberg and Facebook -- the societal norm of reciprocity says that when you take something, you are expected to give something back, and what appears to be a largely ceremonial act like this one doesn't count like one involving real personal sacrifice or commitment.

Over at competitor Google (Nasdaq: GOOG), CEO Larry Page talks about his pet projects incorporating Google technology, including a self-driving car. Like Steve Jobs, we might find this a preposterous diversion (at least when it comes to increasing stock values), unless we hear what Page tells Charlie Rose in a TV interview -- that self-driving cars can emancipate the blind and save a countless number of teenage lives. Whether Google ever really delivers on a Jetson-mobile doesn't matter as much as the clear and consistent love of technology because it can transform people's lives. Doing this means really delivering on the central message of Facebook's roadshow.

Most important, if Mark Zuckerberg can't do it with his own platform, someone else will, and, in the process, lasting value will be created for both customers and shareholders.

At the very least, the dog will be able to drive.