Feeling Left Out

It’s hard to stand by while other people get rich. Today’s paper shows a photo of Steve Case and Gerald Levin embracing after signing their deal. They’re rich and getting richer.

And all across the country people are congratulating themselves on having had the foresight to buy stocks such as the Internet Capital Group at outrageous prices — and watch them become even more outrageous.

Even George Soros — after losing 600 million in the first three trading days of the year — probably brightened up a little yesterday. Soros is not an idiot. He knows the mania will have an end as well as a beginning. And yet, he’s making money from it while I watch and wait.

And when the history books are written, I will be lumped in with all the other Internet-crazed investors. I never bought an Internet stock, nor said a kind word about the Internet mania. Still, the histories will tell the story of those who drove prices to such hallucinogenic levels that no sane or sensible man in the future will be able to read about it without a condescending chuckle and a look of amazement on his face. How could they have been so stupid, he will ask himself? No footnote will record the fact that I said it was all hogwash.

Even in the judgement of history, I fear I will find no reward.

So why not? Why not jump in and buy a few shares? Why not get with the program — and sink or swim with the great drift of lemmings (…I mean investors)?

The reason is that whenever I look closely at one of these Rocket Chip companies, I’m appalled. Even if the archangel Gabriel came down from heaven and whispered in my ear…

“Pssst… Amazon.com will go up tomorrow.”

…I still couldn’t bring myself to buy the stock.

This week’s Barron’s reveals some of the math behind the biggest Internet company on the market — Internet Capital Group. This is a company that has done exactly what I described in an earlier issue. It has made a business out of bridging the gap between private market values and those in the public market. It buys relatively small stakes in Internet companies… helps to nurture the companies along… and then takes them public.

As we have seen, this can be a hugely profitable business. We saw that one venture capital firm had made an 18,000% profit on a deal it took to the public market — even though the stock actually fell on the first day of trading.

Venture capital is the most highly leveraged form of Internet investment. It is like shipping spices from India to Italy in the Middle Ages. When it works — you get rich.

Occasionally, someone made big money in the trade with the Orient. Between pirates and the weather, however, it was an extremely dangerous business. So, the odds on any given expedition were not high. I do not have the figures, but I imagine that financial backers staked the efforts with the odds in mind. There were no developed public markets back then, so they couldn’t shift the risk to the public shareholders.

Internet Capital invests in Internet companies as though it were staking a ship to India. Just looking down the list and the amounts, I have no reason to believe that they don’t do their work carefully, with an eye for keeping investments as low as possible while still providing the capital necessary to get the job done.

They specialize in business-to-business e-commerce. Investors still have high hopes for Internet sites that make businesses more efficient and more productive. So, when the investing public gets a hold of an opportunity to partake of this business — they panic.

Through the middle of December of last year, ICG had invested $331 million in various Internet projects. But the public has bid up the shares to reflect a capital value 142 times greater — or 1,100% greater than the current value of its investments. Go figure.

ICG’s biggest investment is in a site that provides e- commerce services to the steel industry. It bought the site from Weirton Steel — which knows a lot more about the steel industry than ICG. Internet analysts think the site might be worth as much as $6 billion. This is as loony as a Warner Brothers cartoon, in my opinion. You can look at the site yourself: Metalsite.com. It is more likely to be worth zero than $6 billion.

Weirton, presumably, sold for more than it thought the site was worth. But ICG’s stock price reflects a supposed value of at least 10 times what it paid. So, in effect, investors in ICG stock are betting that the steel site is worth more than 1,000% more than a steel company, intimately familiar with it, believes it to be worth. Good luck.

Maybe some of the ships will come back laden with precious things from the Internet. Most will never come back. So, it’s crazy to pay a big premium — from an investment standpoint. You’re much better off, at least from a theoretical point of view, to find the company before it gets to ICG — as Jim Davidson does. Then, you have a hope of making some real money. Otherwise, you’re just on a fool’s errand to line the pockets of the entrepreneurs and stock promoters.

In the case of ICG, Barron’s also reports that the stock available for sale will more than double in February. These are shares held by insiders and promoters which are just becoming eligible for trading. And the company said that “a significant number” of them will most likely be sold. I know what I would do if I had them.

Another stock I’ve followed with some interest is TheStreet.com. This is James Cramer’s investment site – – a business similar to my own. TheStreet.com offers advice and opinions.

When investors bid his stock up to $60 on the first day of trading they must have believed that his business model was sound. Unlike other financial sites, Cramer was charging for the service — $9.95 per month.

Asked about the idea of making it free, he described the logic behind free sites as “a pack of lies,” which uses Wall Street to “monetize eyeballs.” But guess what, revealed Cramer, “they don’t take eyeballs at the bank. They take cash.”

Cramer’s analysis convinced me. But now we discover that he’s switching to the free site business model for his main site… with a few higher priced services behind them.

So Cramer was wrong. His model didn’t work. Nothing surprising about that. Almost none of the Internet models work. But here’s the surprising thing: investors still value the company at more than $400 million. This is a company that has never made any money… and whose business model has been discredited. As a business, I don’t believe it is worth more than $10 million. So how could I possibly buy the stock at 40 times what it is really worth?

Soros said you should ride the trend until it is discredited. Cramer has been discredited in the business world, if not yet in the investment world. His stock, once at $60, still trades at $18.75. I’ll wait until it is 50 cents. Then, I’ll think about it.


Bill Bonner

Paris, France January 11, 2000

P.S. Even if you’ve never bought an Internet or tech stock, you can still make a fortune from ICG and TheStreet.com. If you were a shareholder, you could only realize your gains by selling the stocks. Yet, you can still sell the shares at the top, whether you own them or not. Thus, by short selling, you can make the same gains that the Rocket Chip riders have made — only in the opposite direction. For they will surely go back from whence they came. It is just a matter of time… and timing.

*** Lash yourself to the mast. It worked for Ulysses. He was able to listen to the beautiful sirens’ call… without being lured onto the rocks.

*** A lot of people are being lured onto the rocks of the Nasdaq 100. The index rose 187 points yesterday. Who can resist? The whole market seems to be singing. Maybe a Streisand tune. Something like, “People who own the Nasdaq… are the luckiest people in the world.” Even the Dow started humming along… and moved to a new record high, rising 46 points.

*** The chorus seems to have been stimulated by the “merger” of AOL and Time Warner. “Better than sex,” is how Ted Turner described the deal, perhaps shedding more light on his bedroom than his boardroom.

*** You will have heard about this ad nauseum, so I won’t bother you with further discussion — except to point out that AOL is being very smart. AOL lost $90 million last year. While Time Warner made more than half a billion. How can AOL buy Time Warner? It’s using the cheapest currency the world has ever seen — its own stock. And it’s buying something of real value.

*** Bigger is better. That’s what the market seems to be telling us. But I don’t believe it. My problem is that I’m just not a big thinker. AOL paid a 64% premium for Time Warner. AOL got content. But why pay a premium for it? It could have gotten the content for a whole lot less. This is an ego deal… and a stock play — not a good business deal.

*** I suggested that you might, possibly, maybe, sort of, want to begin to think about shorting the Nasdaq 100 a few days ago. I hope you haven’t done it yet. Someday, people will make a lot of money shorting the techs and nets — but not yesterday.

*** IBM announced that it would adopt the Linux system that challenges Microsoft’s dominance.

*** While the Rocket Chips blast off towards another galaxy… the broader market is rising too. There were 1775 advancing stocks on the NYSE yesterday, and only 1344 declining ones. What you want to do is own solid companies, bought at good prices. Most of these stocks — energy, natural resources, steel, old-economy companies — are rising nicely. And they are nowhere near as risky as the Rocket Chips. For specific recommendations go to www.fleetstreetletter.com

*** Thus the market did the one thing I did not spell out in yesterday’s outline of the possibilities. The Rocket Chips soared… while the Dow rose. And the gap between the two widened. Will it continue to defy history and common sense?!!

*** “You should read the sad history of Napoleon’s campaign,” suggested an anonymous German officer to General von Bock as the soldiers of the Third Reich under his command plunged into Russia. “Why should I read history,” replied the general, foreshadowing the thoughts of today’s Rocket Chip investors by more than half a century, “when I am making history!”

*** The above-quoted conversation does not appear in any history books. I invented this historical scenario to illustrate the reckless disregard for market history in the tech and net sectors. They’re making history. But as was true of both Napoleon’s campaign against Russia and von Bock’s — it is a history that will be much more enjoyable to read than to experience first hand.

*** The guy who won $1 million from E-trade by guessing where the Dow would end 1999 now guesses that it will be at 13,400 by the end of this year. He attributes his success to “dumb luck.”

*** Four-person burial plots in Silicon Valley are going for as much as $265,000.

*** Coffee prices have come back a bit, after a late frost damaged crops in Brazil. Gold is dead. Bonds, though, are sinking.

*** “Truckers — The Nightmare Returns,” says France Soir. Now, truck owners are blocking the roads to protest the compulsory 35-hour work week and gas prices.

*** No one ever accused John McCain of lacking cajones. But he’s pitching his campaign promises to those who do. Breaking with the Republican tradition of promising tax cuts and not delivering, he’s promising instead to “protect” Social Security — into which women pay less than men, and from which they receive more. As Lily Tomlin has said, “no matter how cynical you are about Washington, it’s never enough.”

*** Y2k strikes. A German salesman went to his bank and found that his account had been credited with more than $6 million. No one knows why… but the account date was given as Dec. 30, 1899.

*** On this day in 1973, American League owners voted to adopt the designated-hitter rule on a trial basis.

The Daily Reckoning