The Real Economy

“Thanks to the Internet,” declares a writer in a free e- zine called “Tipworld,” “even neophyte investors have access to as much information as they could find in any investing newsletter.”

The writer has taken the argument over “information” and made it personal. She is attacking, not merely my thoughts on the value of “information” on the Internet — but my livelihood as a newsletter publisher.

Letting fly an arrow aimed directly at my heart…or perhaps my purse…she says, “There’s no need to invest in costly newsletters. That’s the bottom line.”

Herewith, the fight is joined. Not only that, as you will see, I will move quickly to the offense: The abundance of information actually increases the value of discriminating judgement. Plus, it appears that the stock market is about to move to a new stage of the information revolution — in which raw information, and the companies that traffic in it, suddenly lose value.

I have watched this process up close — in the very publishing industry that “Tipworld” believes obsolete. A couple of years ago, we were puzzled by the Internet. Here was a new communications tool so powerful that it threatened to put us out of business. In fact, many people predicted that we would go out of business — for the reasons “Tipworld” suggests. Information was going to be ubiquitous…free. How could you make money selling it?

At the time, the companies that were thought to be incipient gold mines (admittedly, an archaic reference…meaning “very profitable”) were those who provided access to this brave new world of free information — the portals. We were told that we could either become a portal or we might as well close up shop.

Many people in our own business thought that even this was impossible. It was thought that the destructive sweep of the new technology would eliminate traditional publishers. Only younger, quicker, purely Internet companies would survive, we were told.

This was disturbing to me personally. Not yet 50 years old, I was already a dinosaur…surrounded by furry little mammals with computers who were further along in their evolutionary development.

Then puzzlement turned to fear. It was obvious that huge changes were taking place in the publishing industry — caused, no doubt, by the Internet. Would we soon be extinct, preserved only in fossil form, like the imprint of some long-defunct species on a rock in Olduvai Gorge?

We could try to move the whole business over to the Internet. But to what end? No one was making money on the Internet. What would be the point of joining a revolution that was without visible means of support? It seemed like a lose-lose situation. The only sound strategy was to experiment with the Internet…but not waste too much time or money on it.

Meanwhile, we realized that we had never been in the information business anyway. We were in the business of making sense of information. And we reasoned that there ought to be an even bigger market for that now that there was so much information to make sense of. We decided to concentrate our efforts on making sure that our products were good — that they made as much sense of things as we could. Not always agreeing with one another. And certainly not always right. But we would do the best we could.

Whether this strategy will pay off in the long run, I don’t know. But recently, there have been some encouraging signs. We are making money on the Internet — which means we are more profitable than most billion- dollar Internet companies…It is still small potatoes…but better to have small potatoes than none at all.

In short, we have found a way to use the new technology in our old publishing business.

Meanwhile, most of the few Internet publishers I know of are in serious trouble. They are losing money — and have little prospect of ever turning themselves around.

Here’s the real bottom line: it is easier to learn to use the Internet than it is to learn the publishing business. Our experience in the publishing business is being played out all over the economy. People who know how to make and sell products are now discovering how the Internet can help them…and their customers. By contrast, the pure “Internet” businesses are finding it very difficult to break into an established industry profitably. Some will succeed, but most will fail.

Investors, if not “Tipworld” commentators, are catching on. The allure of the e-tailers seems to have faded completely. These companies are not selling products — they are selling a sort of information…such as the price of a pair of pants made by a third party…or which books are published by a real publisher. But this information is not especially valuable. It is too easy for established retailers to present their own information…and sell their own products…via website.

The technology has matured to the point where the “first movers” have no advantage. When companies such as Wal- Mart or the Gap enter the e-commerce market — they can drive down prices…and benefit from better name recognition than their upstart competitors. Established retailers are not selling pure information. They are selling, as we are, judgement — discriminating choices about materials, styles and workmanship that customers feel they can count on.

Competitively, they have a huge advantage. Because they can also use profits from retail operations to sustain their losing e-tail efforts — if they choose to do so. All that sustains the pure e-tailers, by contrast, is the willingness of investors to pour good money after bad. The last few days of trading suggest that that willingness may be coming to an end.

All over the economy, companies are starting to use the Internet as they do any other business tool. This is not the New Economy…nor the Old Economy — it is the real economy…the only one that really matters.

You correspondent,

Bill Bonner

Ouzilly, France April 6, 2000

*** “Greenspan will not allow a bear market in an election year.” That is one of the articles of faith of today’s bulls. They were so sure of this that they waded back into the treacherous tide yesterday — and managed to drive the Nasdaq up slightly by 20 points.

*** These investors have a lot more faith in Greenspan than I do. The man tried to engineer a soft landing…and merely sent the most vulnerable stocks soaring. Now that those same stocks are in danger of collapsing…can Greenspan save them?

*** I doubt it. The market has a mind of its own. It is subject to influence — certainly — from the world’s biggest banking cartel, the Fed. But no one can control it. When it is ready to go down — it will go down.

*** But it wasn’t ready to go down yesterday. At least, not the Nasdaq. Because people still believe they can make money by buying the dips. A CNBC poll showed that 74% of investors see a Nasdaq sell-off as a buying opportunity. Of course, that’s what people think in a bear market.

*** Ten years ago, a similar “buying opportunity” arose in Japan. The Nikkei was nearly twice as high as it is today — at 33,897. Dai-Ichi Securities released this statement on the 28th of February: “At noon time yesterday, the Ministry of Finance’s Security Bureau Market Chief and the stock department managers of the Big Four held their regular meeting. According to those involved, the four managers unanimously declared the market to be at a bottom.” [Thanks to William Fleckenstein of]

*** “In the four years leading up to the end of `89,” reports Sebastian Mallaby in the Washington Post, “Tokyo’s stock market index rose by an average of 29% a year. From 1995 to 1999, the S&P 500 grew at an annual rate of 26%.”

“*** “Western analysts,” he says, “blanched when Nippon Telegraph and Telephone shares were floated on the Tokyo stock market in `87 at a P/E ratio of 250. After Palm Pilot floated recently, its share price quickly rose to more than 1,000 times earnings.”

*** Not to worry. The White House tells us that “economic fundamentals remain strong.” And there are some curiously favorable signs. While the Dow fell 130 points yesterday, market breadth actually ended the day in positive territory — with 1,658 Advances against 1,305 Declines. In fact, those numbers are so curious…I wonder if they’re correct!

*** Gold fell $2.80. As usual, the gold shares did nothing. They don’t seem to care if gold goes up or down.

*** Lynn Carpenter has made two spectacular gains lately — 260% on one position, 200% on the other — in a matter of weeks. She’s a value investor — but she’s developed some system for trading the stocks she wants to own. I’ll find out how she does it and let you know.

*** Baltimore’s new mayor has fired the police chief. He’s bringing in a New Yorker — who implemented NYC’s “zero tolerance” program. But suppose he’s successful? What will Baltimore be like if there aren’t at least a couple of dead bodies on the pavement every Saturday night? It just won’t be the same.

*** Francois is retiring this summer…We went out yesterday and cut up a couple of the big trees that had fallen in the winter storm. We had to get them off the fence lines so the cattle could use the field. Francois has been here all his life. He knows every inch of the place…and how to do things — such as cut up a huge log without getting the chainsaw stuck. I’ll miss him.

*** Francois is going to give a little tour of the farm to a group of Americans who are coming this summer. “International Living” is leading a tour of La France Profonde. The group is going to get cooking lessons…explore the local villages…visit ancient chateaux as well as a country market that has been going on since the Middle Ages. They’re also going to stay at my house…to get a little taste of what it is like to live here. June 25 to July 2. If you’re interested in joining them, call 1-800-926-6575 or 561-243-6276 outside the United States. Ask for Barbara.

The Daily Reckoning