Cleansing The Investment Pool
Included in Dan Denning’s report from San Francisco was a glimpse into the very bright future of biotechnology.
According to Michael Murphy, Dan reports, you will be able to “grow your own organs…there will be gene therapy to treat any disease. We will be able to genetically modify, and presumably improve upon, the species itself.”
“If only Marx had been born a century later,” Dan laments, “he wouldn’t have had to change man’s nature through communism and compulsion. He could have just redesigned the prototype, `designer children’ as Murphy calls them.”
“It is as easy as customizing the features of the car you want to buy on the web. Blue eyes, blond hair, great curve ball, can hit the ball to the opposite field. Very promising.”
That is the thing about technology and the future – it is always very promising. And, thank goodness, there are some investors selfless and brave enough to try to develop it. Even in their failures, says Prof. Josh Lerner of Harvard Business School, “there could be a substantial social return because they led to a greater understanding of what business models did and did not work.”
One of my favorite among the Darwin award winners was a man who essayed to harness the power of technology for his own glory or amusement. He bolted a booster engine from a military jet to the back of his car. Since the booster had the power to lift a multi-ton aircraft off the ground, the promise of thrills it held out, when attached to an ’82 chevy sedan, was irresistible.
And yet, in this brief recitation of the circumstances existing at the moment of ignition, readers may be able to see beyond it…into the future. Something bad was bound to happen…and indeed it did.
As near as experts were able to determine, the first couple of seconds lived up to the promise. The driver must have been thrilled as the car accelerated faster than any automobile ever had. But the next few seconds even surpassed his expectations – as the car took off like the rocket it almost was, and smashed into a distant hillside.
Once the booster engine blasted off, a bystander…even one with no power of clairvoyance and no knowledge of rocket science…might have anticipated the results. Nearly irresistible force would sooner or later meet an immovable object.
So, I come to the burden of today’s letter: some things are so manifestly suicidal that the consequences can be foreseen. There is smart money in the markets. And there is dumb money. And there is money so imbecilic that it practically cries out for euthanasia.
What brings this to mind are the reports of all the many dumb things done in the investment world in the Great Bubble of 95-99.
In particular, a recent article in Forbes reminds me of just how absurd many of the promises for the new technology really were.
“Before the April Internet stock crash and the subsequent tech stock crash…” remembers a Forbes’ reporter, “people were telling me with a straight face that I’d be talking to my car, which would have a wireless Net connection coordinated through a hand-held device and all my other gear. An example of life in the future: The car would know I was stuck in traffic and that I’d be 15 minutes late for a lunch meeting. The car would send a message to my computer, to the person I’m supposed to meet, contact the restaurant, change schedules and confirm the revised plans. Everything would be seamlessly coordinated over the Internet and via emerging wireless technology. Then with bugged eyes, the person outlining this scenario would say, “Isn’t that going to be great!”
The Forbes article cited a TV commercial for IBM – in which a household appliance had called a repair service. And many writers imagined refrigerators keeping an inventory of their contents and ordering supplies via Internet.
“The next thing you know,” continues the Forbes piece, “you’re getting a quart delivered from Webvan within minutes. How could this work? Barcode readers don’t even work at the store half the time. Kids leave milk containers all over the house. Webvan has a delivery charge that requires you to order enough to make it worthwhile. Furthermore, there is no assurance that home delivery of groceries is even going to succeed. And I don’t know about you, but I don’t want my appliances calling anyone and having people show up at the door unannounced.”
“This is all crazy nonsense…” Forbes concludes. “The future is simply not as wacky as we were imagining.”
As wacky at it was, these visions of the future attracted thousands of investment pioneers and billions of dollars worth of real money.
The Financial Times reports that between ’95 and 2000, venture capitalists invested a total of $26.5 billion in Internet-related new tech companies alone.
Those companies that made it to an IPO raised another $75 billion…and some went on to follow-on offerings that raised another $51 billion. And then, of course, investors drove up the stock prices faster than a rocket-propelled chevy. A year ago, these investments looked as though they couldn’t lose. One investment newsletter called them “profit rockets,” and launched an investment service with that name.
The VC investors often got out early – with as much as 1,000% profits. Many other investors sold out too – at prices much higher than their acquisition costs. But those who held should qualify for the investment equivalent of the Darwin Awards. These pilgrims strapped the “profit rockets’ to their own portfolios – and blasted off. We owe them a debt of gratitude. And a silent prayer, perhaps: Not only did they help to show what business models didn’t work… they cleansed the investment pool by taking their own dumb money out of it.
With so much cash in their pockets, the companies went on a buying spree. Pets.com spent $103 million on sales and marketing, at a cost of $179 for every customer it acquired. The idea, as every business man knows, is to bring in customers at lower cost than the competition. Spending $179 for each customer was suicidal.
The FT reports: “Of the money that reached the companies, a high proportion…up to 80% — was spent on advertising in an often futile attempt to attract an audience and build an enduring brand. eToys lost $4.04 on every order. Webvan, [the on-line store your refrigerator was supposed to call], lost $12.90. And Drugstore.com lost $16.42 on every order for non-prescription goods.”
`Lose a little on each sale, then try to make it up on volume’ is the classic formula for going broke. You didn’t have to be a soothsayer to see it coming.
Your correspondent, ready to put the dumbest money out of its misery…
Bill Bonner Paris, France December 6, 2000
*** Alan Greenspan’s belly practically shook, when he laughed, like a bowl of jelly as the Fed chairman hinted that he intended to bring cheer into investors’ hearts this holiday season.
*** The dreamers and schemers who still believe in the New Economy think they have identified the cause of the Nasdaq’s malaise: the Fed has hiked rates 6 times in since June of ’99.
*** Now it is time, they reason, for Greenspan to reverse the damage…to pull out the `Greenspan Put’ and send rates back down.
*** The old inflation hawk “was as dovish as you could ever expect him to be,” commented one analyst following Greenspan’s speech yesterday, “a signal that the Fed may be willing to focus on economic growth rather than inflation risks.”
*** A Reuter’s poll found `primary dealers’ – those who deal directly with the central bank – to be unanimous: the Fed will switch to a `neutral’ bias next week, preparatory to reducing rates early next year.
*** And so the street thought it had caught sight of Santa’s Big Bottom and celebrated with the kind of sharp rally that is common in bear markets. The Nasdaq had its best day ever – rising 10%. The Dow rose 338 points, or 3.21%.
*** Almost all the big techs joined in the fun. Cisco rose more than $6. Intel more than $3 (though still only half what it was a few months ago). And the world’s largest mobile phone maker, Nokia, moved up almost $7.
*** Everything seemed to be going Wall Street’s way yesterday…the economy looked weaker, with new factory orders down 3.3% in Oct. …suggesting rate cuts sooner rather than later. The election looks as though it is going to be finally resolved. Investors were perfectly content with the hung-jury election…but the media’s tiresome election coverage was depressing everyone. Even the price of energy fell…with oil at a 4-month low.
*** But investors will still find some bargains this Christmas season. For while Energy, the Election, and the Economy all seemed to line up nicely, the 4th E, Earnings, is still a problem. Amazon, with no earnings in sight, fell more than $1 after its website crashed. The stock was $113 last Dec. This year, investors can stuff their stockings with it at an 80% discount.
*** 3Com announced higher-than-expected losses. Investors decided to discount that stock by 25%. And Apple reported falling sales and its first quarterly loss in 3 years. Shares fell to $15 – again, about a 75% discount from their price in September.
*** Another discounted stocking-stuffer is Xerox. Yesterday, the company’s bonds were downgraded by Moody’s to junk status – and both its bonds and stocks took a beating, with shares losing 20% of their value.
*** Xerox is the subject of a book by Douglas K. Smith and Robert C. Alexander, “Fumbling the Future: How Xerox Invented, then Ignored the first Personal Computer.”
*** As Jim Davidson explains, “researchers at Xerox correctly anticipated the technology of the modern office [nearly 20 years ago], only to see the corporation for which they toiled ignore the multi-billion dollar commercial potential of their inventions. Not only did Xerox invent the personal computer, Xerox also invented the fax machine, and kept it lying around gathering dust, never to exploit it…Xerox researchers also pioneered the idea of parallel computing…[and] invented the laser printer, but stood back to allow other companies to pocket most of the billions that derived from their invention.”
*** An observation: inventions are like votes and kisses, it’s what you do with them that counts.
*** “If I were Mr. Bear…” I wondered, as I peered into his perverse and cynical heart …I would give investors a break during the holiday season, let them shore up their balance sheets and their courage. Yesterday’s rally could peter out today, but don’t be surprised if it continues. Friday’s unemployment numbers should be weaker – and should tease investors with hopes of coming rate cuts – like visions of cherry plums dancing in their heads. Investors will continue to believe in Santa Claus…I mean in the Greenspan Put…until it fails them. More below.
*** If my guess is right, Mr. Bear is giving a present to those who know what to do with it…and setting a trap for those who don’t. The Xmas rally…to the extent it develops…will be a good time to sell. Sell stocks…and the dollar.
*** The dollar rose slightly yesterday – to 88 cents/euro. Wouldn’t it be nice if the euro would go back below 85 cents?
*** TheStreet.com reports that there were 182 funds that gained more than 100% last year. Guess how they’re doing in 2,000? Only 6 are in the black at all. And the top 10 – which averaged 300% gains for ’99 – are showing a 43% loss.
*** We took the Eurostar back to Paris last night. Sophia had done her shopping and been to a few museums. I had attended a couple of board meetings, pretending to keep a close eye on the business. London is a terrible place in the summer – packed with tourists, often hot enough for air-conditioning but with little of it to be found. But it is a wonderful place before Christmas – with holiday decorations everywhere…and cozy fires in hotel lobbies.
*** Anyway, I spoke to the steward in French and we sat down next to two businessmen – one from England and the other from France. The two must not have realized that we were American, because they immediately began a discussion about how hard it was to deal with their American counterparts.
*** “They just don’t seem to understand anything,” said one. “Yes,” said the other, “they are nice…like that Ms. Johnson we had on the phone in the conference call yesterday…but they are all so stupid.”
*** Sophia suppressed a giggle. Should I interrupt? Or just say something in Americanese to Sophia so they would feel embarrassed and quietly change the subject? I decided to listen: It turned out, they worked for a global telecom, headquartered in the U.S. And as they described the blockheaded things their U.S. colleagues were doing – I found myself in agreement with them.