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Speculation In This Sector Will End "Very Badly," Canada's Warren Buffett Says

Whether it’s subprime auto lending, Janet Yellen’s “stretched” biotech sector, or corporate credit, bubbles abound in today’s fragile market and like Mark Cuban, Prem Watsa thinks the valuations investors are placing on private tech companies are simply ludicrous. But the insanity isn’t confined to private companies, Canada’s Warren Buffett says. “Speculation” is rampant in publicly traded shares as well. 

From Fairfax Financial’s shareholder letter: 

I am always amazed at the speculation that can take place in the stock market, as shown in the table below, and how long it can last:

The continuing speculation reflected in the stock prices of public high tech companies has moved to private high tech companies, as shown in the table below:

The Wall Street Journal says that worldwide there are 73 companies that are valued at more than $1 billion by venture capital investors, versus half that number prior to the dot.com crash. The third column of the table above shows the ratio of the latest valuation of each company to its total cumulative equity funding raised from inception. So Uber has a valuation of $41.2 billion as compared to the cumulative equity capital raised of $2.8 billion – i.e., the valuation is a hefty 14.7 times all of the money that was raised by the company. 

 

We’re confident that most of this will end as other speculations have – very badly!

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Of course this time is always different, but when it comes to multibillion dollar valuations and tech startups, count us among those who think the following warning from Mark Cuban will one day prove to be particularly prophetic:
"The only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity."