Have you ever wondered why so many trust the TV for financial advice or stock tips?
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You guessed it: It comes back to "brain science" or the concept of familiarity. When we see a celebrity or our favorite stock guru on the television, it arouses our emotions and connects us with the idea, making the experience more memorable. The brain tends to treat our favorite newscaster or celebrity as a trusted, familiar friend, and therefore we translate those feelings into expertise and a "valid" endorsement.
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As humans, we can sometimes be misled. Recently, Kim Kardashian had to pay $1.26 million to settle an SEC charge that she promoted a cryptocurrency while failing to disclose she had been paid $250,000 to do so. Other influencers were recently charged with a $100 million pump and dump scheme. Investors have to be careful out there about what information they are getting, and why they are getting it.
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Skin in the Game Could Be a Terrible Thing When It Comes to Stock Analysis
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At Valuentum, we believe the independent voice is the best one, and that's why Valuentum and I don't take positions in any individual stocks. We want to limit conflicts of interest as much as possible with our research and analysis. 'Skin in the game' makes sense for a lot of things, but having an ownership position in a stock could result in biased stock research and analysis, while adding no information value. Crypto gurus such as Sam Bankman-Fried had tons of 'skin in the game,' but with the collapse of FTX, he has now been arrested on federal charges.
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It's clear 'skin in the game' is not always a good thing and could lead to poor outcomes, sometimes dire ones. We believe in independence and integrity when it comes to stock research and analysis. Quite simply, owning a stock doesn't make one smarter about that stock, nor does it give the investor an edge. In some cases, owning a stock could result in too optimistic of research and analysis and lead to blind spots about key risks to the story. These research and analysis blind spots could then lead to some serious losses. 'Skin in the game' in this case could be a terrible thing.
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Origins of Celebrity Branding
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Probably one of the first types of celebrity branding came from trading cards in the late 1800s. The cards were given away in packs of cigarettes to heighten demand as consumers bought more to finish the entire sets of baseball cards. Things really took off in the 1930s, and Babe Ruth was probably one the most popular celebrity endorsers of that bygone era. From White Owl cigars to Old Gold cigarettes to Pinch-Hit tobacco to Raleigh cigarettes to Red Rock Cola and beyond, Babe Ruth was everywhere.
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In 1930, when asked by a reporter whether he thought it was right to be making more money than President Hoover, Babe Ruth responded, "Why not? I had a better year than he did." The people loved him, and at the time of the Great Depression, that touch of cockiness and humor was what people wanted. Corporations know the power of the celebrity advertiser, but we should be careful not to read too much into the stock tips given on TV. Think of business television as entertainment, nothing more nothing less.
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How We Overcame the Hazards of Celebrity Influence
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Back in 2015, Valuentum had its first run in with the potential hazards of celebrity influence when we published our work on the pipeline MLPs. Our thesis was picked up in Barron's.com and commented on in other media outlets from Benzinga to Seeking Alpha to S&P Global and across the sell-side community. We noticed a glaringly obvious mispricing across the MLP space at the time, and we pounded the table on our views.
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The long and short of the story is that most pipeline MLP investors weren't paying attention to the concept of intrinsic value, as calculated by the enterprise valuation process (i.e. the discounted cash flow process). Most were focusing on distribution yield-based valuations and distributable cash flow, a misnomer not to be confused with discounted cash flow. Most analyses from our perspective were completely ignoring the growth capital outlays within the enterprise valuation context. You know the rest of the story.
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