Magnificent Obsessions

Once I built a railroad, made it run Made it race against time Once I built a railroad, made it run Brother, can you spare a dime?

What is it in the human character that makes people do things against their own best interests?

The question could lead to a long discussion…late into the night. It would be a good one for a Paris cafe…where tobacco-stained fingers could wave about…or jab the night air to make a point — alternately raising a half-lit cigarette…or a glass of table wine.

It could involve the classics — perhaps even Socrates’ last discussions. Urged by his friends to flee and save his skin, Socrates decided to stay and drink the hemlock, for the good of others — for the good of the community. At least, that is what he said.

Or you might probe the controversial mysteries of sociobiology…of the gene for altruism…or the mass suicides of the lemmings.

Or perhaps you could explore the curiosity of warfare — where young men sometimes undertake projects in which they will almost certainly be killed. American pilots who struck the Japanese fleet at the battle of Midway, for example, went off knowing that they probably had insufficient fuel to get back.

But I will stick to my beat — investments.

TNT stocks are almost certain suicide — not for any particular investor, but for the average investor who puts his money in them. The individual investor can tell himself that he — like the lucky few on the battlefield — will be the one whose profits survive. He can imagine that he will duck just in time — and sell on an uptick. Or perhaps he can delude himself, believing that the whole sector will defy the laws of economic gravity and somehow…against all odds and reason…they will all get rich.

In either case, I wonder, what purpose would be served? The answer came to me in an odd little statement whose source I can no longer recall. “There are investments,” said my forgotten source…or words to that effect, “in which you invest money for an expected stream of future income, discounted to present value. And there are charities…in which you put up money to make the world a better place…with no specific return expected. Most investors seem to have forgotten the difference.”

Jeff Bezos gives a hint of his own charitable inclinations in a recent interview in “Playboy.” “We’re not [trying to be a book store or video store or a toy store]. We are trying to be a customer store.”

See. He’s not trying to make money. He’s trying to benefit the customer, which includes practically all mankind. Perhaps he is serving mankind. But he’s not serving shareholders very well. AMZN, the river of no return, fell 11% yesterday. And for good reason. The company has a profit margin of minus 39%. With 7,600 employees, five years of effort and sales of $1 billion, Amazon is no longer a little experiment. It is a big experiment — and one that is failing.

Amazon is providing a great service. I use it myself. It is very easy to order books from Amazon. Every time I use the service I feel I should thank Amazon shareholders. Their money is being given to me — by providing me with a service at nearly 40% less than it actually costs. I am a charity recipient, and a grateful one.

Many thanks to the Internet and tech investors who have made Amazon possible. They have funded hundreds of experiments and many other magnificent obsessions. Without them, the pace of innovation, and hence the material advance of mankind, might be retarded. They are sacrificing themselves — like front-line troops on a suicide mission — in the cause of progress.

At least, that is the, shall I say…charitable… interpretation. A more hard-nosed reading of TNT investments is that they are just money thrown away. Projects that are not rewarded with profits are not really good investments. The capital would be better used elsewhere.

But if life were so simple and so reasonable, there wouldn’t be any manias in the first place, and I wouldn’t be trying to figure out what they might mean.

One of the popular analogies of the digital age has been between the Internet and railroads. More specifically, the comparison has been made between the railway tracks that spread out all over America at the beginning of the 20th century, and the wiring of the nation now for the Internet.

Stock market bulls have pointed out that the railroads were a huge success. The bears have noted that many went bankrupt…and the shares crashed several times…before they settled down.

It might also be noted that early railroad investors provided a huge service to the public. They put in their own money so that the system could be built out — perhaps more rapidly and more extensively than rational investing would suggest. Once the railway investment mania took hold, investors rushed to get on board. They took up railway issues with such enthusiasm that they reduced the cost of capital to the entrepreneurs — thus guaranteeing overbuilding…and a consequent bust. This has happened in the Internet sector, too, in a couple of interesting ways.

Under pressure of Y2K, companies spent a fortune on new computers and software last year. Now they have capacity that they don’t need. According to press reports, it was exactly this observation by Rick Sherlund of Goldman that drove the techs and Nets down yesterday. He noticed that spending on computers is not picking up as expected. Companies have all the computing power they need. They’ve also seen that IT spending doesn’t necessarily pay off the way it was supposed to.

Meanwhile, George Gilder’s latest Next New Thing, broadband, is perhaps already broader than it needs to be. With the free money provided by self-sacrificing investors, entrepreneurs are laying a lot more “pipe” (see, I can use the jargon, too…this is what they call fiber optic cable, the Internet equivalent of railway track) than the world needs. A “WSJ” article reported that only 6.5% of the fiber optic cable being installed in the United States is being used. What’s more, it is estimated that even four years from now, that figure will still be below 10%.

In other words, 90% of the broadband pipe will remain “dark fibers” for the foreseeable future. No wonder the price of bandwidth is falling. According to a chart in Grant’s, a unit of bandwidth has declined about 45% over the last 12 months.

Broadcom was down over 18 points yesterday. Global Crossing went down $3 after offering 43 million new shares. Winstar, raising cash through a bond offer, was only able to bring in $1.6 billion at 12.75%…rather than the $2 billion it had hoped for, at a lower interest rate.

All over the Internet, excess capacity — built by the grace of God and financed by investors who are sacrificing their own welfare for the benefit of mankind — portends a collapse in stock prices. AOL/Time Warner trades at a P/E over 200. If it keeps growing profits at present rates…10 years from now, it will still have a P/E over 51. Yahoo trades at 623 times profits.

Charity may be rewarded in heaven. But not in the investment markets. The HHH, the Internet tracking stock, is down 30% from its high, with a lot further to go.

Until tomorrow,

Bill Bonner

Paris, France April 13, 2000

*** Ooh la la…I feel their pain. I mean, the pain of TNT investors. The techs, Nets and telecoms took another big hit yesterday. In fact, the Nasdaq made its second biggest decline in history — down 286 points.

*** Rotation from the New Economy back to the Old one? Forget it. The Dow was down, too — 161 points. The Dow lost $160 billion of capitalization. The Nasdaq, meanwhile, gave up $420 billion.

*** A hundred billion here…a hundred billion there — it begins to add up to some real money. A month of days like yesterday and the whole market will be worth zero.

*** “It looks to me as though the tech/Net game is about over,” wrote Richard Russell yesterday. No doubt, the cracks in the New Information Age myth widened as the market took up the work that reason failed to do. You can’t reason people out of a mania…they have to be crushed, exhausted and run out by fear. The conclusion of this thrilling epic is coming soon…

*** But look on the bright side. It will be easier to get a table in a good restaurant in Manhattan. Buying a house in the Hamptons or Silicon Valley will be cheaper. And employers will lose fewer workers who “call in rich.”

*** Speaking of real estate…my brother handles farms and other expensive properties in Charlottesville, Va. He used to shoe horses…but stopped after he drove a nail through his arm and into the hoof of a nervous horse. Now he buys and sells farms for people such as John Kluge and Sam Shepard.

*** Brother Jim reports that upscale properties are as hot as a farrier’s forge. He often tells clients that properties are not worth the asking price — but they buy them anyway.

*** And he’s not anywhere near either one of the epicenters of the real estate boom. Prices in the Hamptons or in Manhattan are absurd. In the SF Bay area, according to a report on, houses in March sold for 30% over the asking price. My correspondent in the area, Rick Ackerman, forwarded a copy of an article that tells of “an unassuming 4-bedroom house that inspired a 22-way bidding war…The winner reportedly paid close to a million more than the $1.25 million asking price.”

*** Some buyers in the SF area are offering the seller stock options in addition to cash… “It’s beyond crazy,” said a real estate agent. “It’s madness.” Very nouveau riche people are buying ranch houses and cottages as “tear downs” for as much as $700,000. In their place, they’re putting up “monster homes.”

“It’s like hitting the lottery,” said a seller, whose modest home sold for more than $1 million more than the asking price.

*** But it makes sense. If you had $100 million worth of Internet stock…wouldn’t you want to trade some of this paper for something more tangible? Or, to put it another way, after the crash in the TNT sector, which would you rather have — a horse farm in Charlottesville…or a stack of worthless paper? Heck, you wouldn’t even have the paper…just the ether of electronic information that no longer existed.

*** It’s official! CNBC says the Nasdaq is officially in a bear market. Hmmm…Watch out. There is still a tremendous “buy the dips” mentality in place. There could be an explosive upside rally…or an explosive downside crash…What there probably will not be is the orderly, official bear market of CNBC’s imagination.

*** Among the myths of today’s markets is the idea that analysts’ recommendations mean anything. A stock analyst working for a brokerage house is one of our era’s greatest charlatans. He pretends to “analyze” stocks — and to present an informed, rational view of what to expect. In fact, he is nothing more than a cheerleader for a bull market. The cat was let out of the bag by an analyst for Morgan Stanley, reported by William Fleckenstein. “We have to accept the facts of life,” said the analyst, who must have been too drunk at the time to suppress the truth. “If investors want to be in these high-growth companies, we are just trying to take what they are willing to pay and translate it into a target price, and therefore a stock recommendation.”

Advice to analysts: Tell them what they want to hear — especially if it helps move the paper. Cite a lot of numbers and other magic incantations. Give them the old hocus-pocus…and make sure you stack the deck before you deal.

*** The IMF’s semi-annual economic quackery hit the press yesterday. Its World Economic Outlook says the world economy is in good shape. But it warns that there is a 33% chance of a “hard landing” for the United States. How do they know? They don’t. Only the market knows. And it doesn’t tell in advance.

*** Oil rose $1.27 yesterday.

*** I wonder what would happen if they subjected air travel to “hedonic” adjustments. Airfares are down. But so is quality. A survey released on Monday showed that service declined last year — in almost every category. I hate traveling by plane. You have to go out to the airport…waste a lot of time…get run through metal detectors, customs, passport control — one mindless indignity after another. Then you’re trapped on the plane for hours. But what can you do? There’s no train across the Atlantic.

*** A British artist is in line for an art prize worth more than $30,000. Her latest work, entitled “Honey, I parked the van in the living room,” is a delivery van, dismantled and reassembled in a living room. She describes it as “deceptively simple.” It is certainly simple. And it is a bit deceptive, too. But maybe not in the way she imagines.

*** I’m starting to like the new millennium…art critic and Minnesota governor, Jesse Ventura, dared to attack one of the 20th century’s great art icons — Picasso. According to the French press, he said in a Playboy interview that Picasso’s work was “nul” — stupid…a waste of time.