70% in 1 Year: The Most Dangerous Stock of 2024?

If you’ve been reading Quantum Wealth Report for a while now, you will notice a constant theme in our research.

The pattern is quite obvious. We will usually cover very particular range of businesses. I’m talking about companies that are focused on things like real estate, industrials, or energy.

Are we being fussy? Well, maybe. Here’s our reasoning:

• More often than not, these companies will have tangible assets on their balance sheets — in the form of land, property, or machinery.

• You can see these assets. You can touch them. You can measure them.

• This simplicity leads to clarity. And clarity might just make these companies idiot-proof.

Warren Buffett himself had something to say about this approach:

‘I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.’

Does his folksy wisdom make sense? Well, you can think of it like this:

• As a value investor, Buffett might not want to buy into a business that’s overly complicated. Because if it is overly complicated, there’s more room for error. And when there’s more room for error, there’s a higher level of risk.

• Instead, Buffett might choose a business with an operation that’s easy to understand. In fact, the more streamlined it is, the better. It becomes, in essence, idiotproof.

So, with this philosophy in mind, when we look at a company, we will tend to ask ourselves five basic questions:

• What are the tangible assets here?

• Is there margin of safety?

• Is this stock undervalued?

• What’s the long-term upside?

• Is there potential for income?

Yes, we will perform our due diligence. We will run through the fundamentals with a fine-tooth comb:

• Now, in the process of doing this, we will find that a lot of companies will simply fail to meet our criteria. One industry, in particular, stands out: software development.

• Why? Well, because companies in this area have a lack of tangible assets. In fact, most of the time, their main resource is what’s known as ‘intellectual property’ — which is the software they have developed.

The problem with software is that it does lack a physical form:

• You can’t see or touch or hold software in the real world. It’s purely virtual. So, the key economic value here is the exclusive right to produce and distribute it.

• This means that ownership of the software is tied up in a licensing agreement. A customer will pay to be granted the right to use the software. However, the underlying intellectual property remains with the company. No actual transfer of a physical product will ever take place. Therefore, it’s a non-tangible asset.

• So, this business model creates some difficulty for us. How do you fairly value something that exists only on the cloud? Something that can be reproduced and copied with just a few clicks of the mouse? Something that can become outdated in a matter of months, if not weeks, without constant updates?

Now, of course, you might argue that we are being too rigid about this issue of non-tangible assets. We’re being too inflexible with our criteria:

• After all, aren’t there software developers out there that have made a fortune? Haven’t they maximised the potential of their intellectual property? Haven’t they changed the world with their innovations? And, really, do tangible assets even matter in this age of artificial intelligence?

• Well, these are valid points. And, hey, I always like to keep an open mind. Which is why I’ve been watching one particular software business with AI capabilities.

• In the past year, the stock price for this Company has climbed over 70%. It has certainly shown strong momentum. However, given last week’s events, it’s important to understand that this software business is now swimming in dangerous waters…