A wing and a prayer

Founder and Chief Investment Officer of Montgomery Investment Management
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Key points

  • When it comes to capital-intensive businesses like airlines, accounting standards can be inadequate for measuring the true performance of the business.
  • The profit, after such inadequate expenses and depreciation have been subtracted, is artificial and doesn't take into account equipment replacement costs.
  • Airlines are tough businesses: capital-intensive, labour-intensive, fiercely competitive and ultimately selling something that people want to pay the lowest price for.

It’s true I am getting nervous about the market. I can’t tell you what will be the catalyst, nor that the market is wildly expensive – it isn’t - and I cannot even tell you when or even if there will be a correction, but I can say that there are many signs – economic, market, corporate, sentiment and the level of unprofitable IPOs – that suggest it is wise to dance close to the door.

My nervousness is perhaps best illustrated by the enormous and arguably illogical gains seen in the share prices of airlines. I suggest illogical because the very long-term economics of these businesses are, more than many if not most others, so unpalatable as to be dangerous to your wealth.

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