The Theranos Incident Shows Why It’s Dangerous to Invest Based on Hopes And Dreams

I do admit that a business is nothing without goals, hopes, and dreams. A successful business requires the founder to have a vision and to be able to turn that vision into reality. A successful business is one that has managed to turn hopes and dreams into reality. And by reality, I mean cash. Cold hard cash.

Think Apple, think Facebook. Both Apple and Facebook was once a startup before they became a giant successful company. They had founders with remarkable vision. And they have succeded in turning that vision into a reality.

Look at the image above and we see two companies that are generating a crazy amount of cash now. Apple and Facebook have managed to turn the vision of their founders to reality. Once, Facebook and Apple in their most infant stage were once simply hopes and dreams, but today, both Apple and Facebook is an amazing cash generating business.

If we had invested in Apple and Facebook back when they were still not generating a lot of cash, and we hold it until now, we would have made a crazy amount of returns and become a crazy rich asian. Joke aside, that is the truth. Despite this truth though, I think that it is still dangerous to invest in a company based simply on hopes and dreams. Because of a simple fact, for every Apple or Facebook, there are hundreds out there who aren’t.

Simply put, I’d rather invest in Apple and Facebook when they already started generating cash than when they were still simply selling hopes and dreams. I’d go for the sure thing. Because most companies aren’t Apple and Facebook.

“I’d rather invest with a life vest on my shoulder. And that life vest, is fundamentals, that lifevest is valuations. That lifevest is cash, not just hopes and dreams.” – Chris Lee Susanto

Theranos is definitely not Apple and not Facebook.

Theranos founder Ms. Holmes once drew the comparison to Steve Jobs, founder of Apple for her bold talk and black turtlenecks. She talks the hopes and dreams but turned out to be a fraud.

Theranos is a blood-testing company and was once the darling of Silicon Valley. Those days are gone, They are now known as Silicon Valley’s biggest fraud. They will be officially dissolved, according to an email to shareholders, based on WSJ’s latest article. You can download it here.

Who are the biggest losers in this incident?

I will give you a hint by sharing with you more story first.

It turned out that Theranos will pay its unsecured creditors its remaining cash in the coming months. And just for background information, this dissolution process of the company was started due to the fact that Theranos had breached a covenant governing a $65 million loan it received from Fortress Investment group in 2017. Fortress is a private equity firm. And under the terms of the loan, Fortress was entitled to shut down or dissolve the company and seize their assets if its cash fell beneath the pre-determined threshold.

Under the email to shareholders and as reported by WSJ, Theranos’s general counsel and CEO, David Taylor said that Theranos is still negotiating with Fortress to give them ownership of the company’s patents and leave the cash of $5 million untouched for other unsecured creditors.

But the result of the negotiation is still a big question mark.

The biggest loser in this incident is, on the other hand, not a big question mark.

The investors are the biggest losers. All in all, investors of Theranos have already lost nearly $1 billion. And these investors are not small-time investors. They are big investors. They invested in Theranos’s hopes and dreams and lost big time. They invested in Theranos’s claims that the blood testing device they have could run the full range of laboratory tests simply from a drop or two of blood pricked from the finger. These are bold claims by Theranos and it managed to attract in total a $9 billion valuation at the peak of it all for Theranos.

Sadly, these are just simply hopes and dreams because they are not the truth. These claims are not yet proven and certified a 100%. And yet, investors poured money in Theranos.

As a result, these big investors lost big time. These big-time investors include the heirs to Walmart inc, the Waltons and even Rupert Murdoch, the executive chairman of 21st Century Fox and News Corp – the WSJ’s parent company.

So what can we learn from this lesson that has caused big-time investors to have already lost nearly $1 billion? It is simply the fact that when we invest, we need to be careful that we are not investing in merely hopes and dreams. In this case, it is a private investment for a company that has not been listed in the stock market. Hence, their books are definitely more “private” and “secret” than listed firms as listed firms are more regulated. But even listed firms have many investors that are investing in hopes and dreams – not cold hard cash. Now, that is extremely dangerous.

Yes, I know what you are saying. If we have invested in the right company that manages to turn these hopes and dreams into reality, we would make crazy returns and be a crazy rich asian right? But let’s face the fact, not every company is like Apple and Facebook. Do not let greed makes the investment decision for us. Maybe we can put some small percentage on these companies with a great story that has hopes and dreams (a big maybe), but it’s always better to invest based on great valuations founded by real fundamentals of the cold hard cash. This is the way I invest, and this will always be the way I invest.

Valuations for stocks as explained by Prof Aswath Damodaran, the “Dean of Valuation” should not be founded on hopes and dreams. Valuations ultimately will be about the cash and as defined by Warren Buffett, the cash that a business is expected to make over the course of its lifetime. Not about hopes and definitely not about dreams. Investment, in my opinion, is about making less wrong and focusing on minimizing risk, then the upside will take care of itself. And we can minimize risk by not investing too much, on merely hopes and dreams. It is dangerous.

What do you think?

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I hope you have enjoyed the article. Thank you for reading. 🙂