Tilting the investing odds in your favour

About Latest Posts Scott PhillipsScott Phillips is The Motley Fool's Chief Investment Officer in Australia. He is Advisor of The …

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're like me, your email inbox receives a steady stream of correspondence from so-called daily deal websites.

Clearly many at the big end of town think there's something to be said for the phenomenon – Cudo, Living Social, Spreets and Scoopon are a few of the names that would be familiar to many Australians and they have the backing of some serious media and retail players.

A crowded market

Cudo is a joint venture between Microsoft (Nasdaq: MSFT) and ninemsn, Living Social counts Amazon.com (Nasdaq: AMZN) among its shareholders, and Spreets is now owned by the local joint venture between Yahoo! (Nasdaq: YHOO) and Seven Media.

The granddaddy of them all is Groupon (Nasdaq: GRPN), the US-based site that went public last Friday. Well, granddaddy might be a stretch – the company that started the daily-deal frenzy only turns 3 this month.

Now when people are prepared to pay many billions for a company like Groupon, you'd imagine a business with a long track record, insurmountable competitive advantage and large profits, right?

Paying up for potential (they hope!)

Not so fast. As I've already mentioned, Groupon is only barely out of its corporate nappies. No-one really knows how the business will perform when times get tough, whether customers will keep coming back, what the competition will look like, or how sustainable its profits are.

And yet the market is valuing it at upwards of US$16 billion after the first few days of trading.

Put me down as sceptical. I'm not prepared to predict its demise at this point – the short history of both the company and its market mean that history is no guide either way – but I'm certainly not prepared to put my money on the line.

A fairytale in the making?

Groupon's IPO success makes it the stereotypical 'story stock'. Investors in these types of companies are less focussed on this year's numbers, looking instead at the possibilities. They can see futures for these businesses that make today's price look cheap.

Sometimes, those stories come to fruition. Who among us wouldn't have liked to get in on the ground floor of an Amazon or Fortescue (ASX: FMG)? The problem is that these ventures are the successful few, dwarfed in number by the unsuccessful many.

Or a nightmare on the way

In the United States, the late 1990s tech crash might have stopped many potential IPOs in their tracks but a decade later, the rush of listings from the likes of professional social-network provider LinkedIn (NYSE: LNKD) internet music streaming business Pandora (NYSE: P) and real estate information provider Zillow (Nasdaq: Z) suggests the market's appetite for businesses with a good story is back with a vengeance.

Our market doesn't tend to have the same opportunities in technology or biotechnology that the US markets do. Instead, our stories tend to be ones born from a couple of centuries of experience – miners. Many a small miner has listed on our markets over the years, each hoping to be the next BHP Billiton (ASX: BHP). Some, like Fortescue, manage to scale the dizzy heights, while others fall by the wayside.

As an aside, it's interesting to note that during the dot.com boom, tech companies were using the shells of failed or failing miners to achieve so-called 'back door' listings on the ASX. Once the worm turned and tech companies fell out of favour, it was miners using former tech listings for the same end!

The rare few

Some investors, including The Motley Fool's own David Gardner, have an enviable track record of being able to successfully separate the wheat from the chaff when it comes to these new, often disruptive, businesses. It's a rare skill, and impressive to see in action.

For the rest of us, investing in those businesses in the absence of specialised knowledge or experience can be a little like playing roulette. Sure, if you win, you win big, but it's far more likely that the house will have taken your money before your number comes up.

Foolish take-away

Successful investors take the time and make the effort to discover their circle of competence. To continue the gambling metaphor, in the words of Kenny Rogers, they 'know when to hold 'em and know when to fold 'em'. They don't play every hand the same way, and they only bet when they believe the odds are firmly in their favour.

I'm not sure how history will judge Groupon a few decades hence.

What I do know is that there are other businesses which fit more completely within my circle of competence and investing in that group dramatically increases my chances of being successful. Those are the only companies that really belong in my portfolio – otherwise I'm just guessing and hoping I'm right.

Are you looking for more quality stock ideas? You can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

Scott Phillips owns shares in Microsoft and Amazon.com and has subscribed to too many daily-deal emails. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. The Motley Fool's purpose is to educate, amuse and enrich investors. 

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »