The Daily Reckoning Presents: A DR Classique originally broadcast on April 19, 2001
TRAFFIC ACCIDENTS or The Theory Of Ignorance
“Skepticism, like chastity, should not be relinquished too readily.”
A website offers us an opportunity to “Vote for the Dumbest e-Business Moment.”
The first contender is the “summer of 1970” in which “Kajsa Leander is born in Lund, Sweden…several months later, Ernst Malmsten is born, also in Lund. Together, they go on to found an ill-fated multinational high-fashion e-tailer called Boo.com.”
The site lists a number of bizarre and amusing events in the life of the dot.com bubble – confirming both my faith in man’s ability to delude himself with visions of grandeur…and my new Theory of Ignorance.
Noted, of course, is Dec. 16, 1998, when Henry Blodget predicted that Amazon.com would go to $400 a share. He was not joking – it did. But shares in Amazon.com can now be purchased for just a little over $10. And don’t be surprised if they are eventually free.
And there is that day in June 1999, when Mark Beier, CEO of Beyond.com, appeared on CNBC’s Squawkbox dressed only in his boxer shorts. The gag was designed to underline the fact that you could buy everything you needed over the Internet – dressed only in your underwear. Of course, it might have been taken as a forecast of what would happen to Beyond.com’s shareholders. They have lost their shirts…and maybe even their pants…as the stock has dropped to 28 cents. This week’s issue of Barron’s has it listed as one of the companies scheduled to run out of operating cash this month.
“One of every three publicly traded ‘Net outfits’ stands to run out of cash within the next 12 months,” says Barron’s. “And that does not count those that already burned out.”
“The remaining 214 companies,” continues the report, “had negative earnings before interest, taxes, depreciation, and amortization of $2.29 billion, substantially higher than the negative $1.37 billion EBITDA in the previous quarter.”
What a sad end to such a magnificent delusion: The Internet Age. The dot.coms have lost a total of About $1 trillion in value since early 2000.
But there is something magical about big, dumb ideas. In any specific application, they may be demonstrably absurd.
The “boo crew”, for example, as the 450 employees at Boo.com were known, spent money as if, well, it was not their own. Expensive offices in London, New York, Paris, Munich, Stockholm…$5,000 a day to fashion consultants just to perfect the look of “Miss Boo” on the website.
This was a company with almost no sales…whose managers were burning through $135 million, with almost nothing to show for it.
Who in the rag trade would spend his own money that way? No one. The actual experience of doing business and having one would weed out such incompetents…to teach them.
But it was a New Era…and people believed in the Big Ideas behind it. Even when they didn’t work in practice, people still had faith in the theory.
That is why the War on Drugs continues too. Hundreds of thousands of people are sent to jail. Billions are spent on “law enforcement.” Otherwise harmless drug users are driven into a world of crime and sordid company. No, I don’t mean politics, I mean street crime.
You can make something illegal, but you can’t make it unpopular. In the movie “Traffic,” the daughter of America’s drug czar begins using illegal drugs while her father is away in Washington waging war against them.
The perverse irony of the film is sure to appeal to Daily Reckoning readers. Nothing quite works out as it is supposed to. And in the end, the nation’s drug czar realizes that his problem is at home, not in some distant command post, directing a phony war.
The Theory of Ignorance maintains that people know a whole lot less than they think they know. But as someone has observed, it’s not what they don’t know that gets them into trouble, but what they think they know that ain’t so.
When a man drives down the road, he makes thousands of decisions every minute – any one of which could be fatal. But he knows what will happen if he turns the steering wheel in the wrong direction and usually ends up where he intended to go.
But his ignorance of cause and effect increases as the subject of his decisions gets farther and farther away from his immediate, personal experience. In fact, like the intensity of heat, it diminishes by the square of the distance from the source.
At a far enough remove from his own experience, the same man who drives himself down the street without accident sees no road signs, no white lines, no on- coming traffic. He drives his tractor trailer straight into a concrete wall…and seems genuinely surprised when the results are fatal.
Thus do investors buy shares in companies that do things they would never do in their own businesses and support big dumb ideas – population control and the War on Drugs, for example – which offer no identifiable benefits to anyone.
Also on Barron’s list of dot.coms running out of cash is Theglobe.com. It is trading at 20 cents and scheduled to run out of money in August or September. But every dog has its day, and Theglobe.com enjoyed one brief day of imbecility, when investors paid $97 for the stock – a price equal to 350 times the revenues per share booked in the entire life of the business. Was there a single person in the entire world with business experience to justify such a price? No, of course not. It only made sense within the context of the New Era theory.
Finally, in May 2000, the deadly duo from Lund called it quits…”It’s easy to say that we spent $135 million on Concordes and Champagne,” Malmsten tells the NEW YORK TIMES, defending himself, “but we only drink vodka.”
Raise a glass to the dotcommers. We’ll miss them.
Your faithful correspondent,
August 13, 2001
*** “The formula for valuing all assets that are purchased for financial gain,” says billionaire investor Warren Buffett, “has been unchanged since it was first laid out by a very smart man in about 600 B.C. The oracle was Aesop and his enduring though somewhat incomplete investment insight was ‘a bird in the hand is worth two in the bush’.”
*** Today, in honor of it being Monday, we take a break from our usual “negative drivel” to report some positive news…and dispense with a smidgeon of advice.
*** First, the news: last week – the same week Cisco announced profits dropping 84% – Buffett’s Berkshire Hathaway announced 2nd quarter net profits 21% ahead of last year’s.
*** “Aesop’s investment axiom…is immutable,” says Buffett. “It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota – nor will the Internet.”
*** “What people forget,” says Money.com’s Walter Palgrave, “is that what you earn on stocks and even the return over very long periods depends in part on what you PAY for stocks.”
*** “[Buffett] merely buys what is a good buy – at the time,” says Lynn Carpenter, of The Fleet Street Letter.
*** Carpenter’s advice: “Start with the assumption that the market could do the worst possible thing – it could drop60% across the board – and take it from there.”
*** Eric, what’s happening on Wall Street?
Eric Fry reporting from New York:
– What a novel idea…investors appear to be picking up on the Buffett theme and are favoring companies that produce profits over those that do not. The Dow gained 117 points Friday while the Nasdaq lost 6. For the week, the Dow shed less than 1% while the Nasdaq tumbled more than 5%.
– Of course, a week does not a trend make.
– Wholesale prices fell 0.9% in July, according to the Labor Department’s latest PPI report – their biggest decline since 1993. Energy prices also plunged 5.8% during the month, the steepest drop in 12 years. The wags on Wall Street, in turn, have proclaimed that inflation – like polio or the Bubonic Plague – will never afflict us again.
– With wholesale prices and energy and interest rates plunging faster than a Pamela Anderson neckline…could it be that inflation is not our problem at all?
– “Those soothsayers that have been screaming ‘deflation’ because the Fed is too tight exhibit impaired reasoning,” say Bill King. “Yes, deflation is a concern, but the Fed has been the diametric opposite of too tight. This is backward reasoning: ‘I see deflation, therefore the Fed is too tight’…It’s simply not correct, as Japan – and now the U.S. – is proving.”
– Greenspan is both lowering interest rates aggressively and boosting the money supply – the two main tricks of the trade he has used to combat prior slowdowns. But neither corporations nor consumers are increasing their borrowing and spending.
– “Business loan activity has fallen drastically in recent months, and is now below the levels of late 1999 and early 2000,” writes Andy Kashdan of grantsinvestor.com, citing a report from ISI. “[Meanwhile], consumer credit fell last month for the first time in four years.”
– In fact, this may be our worst nightmare – a consumer who doesn’t consume. He may even be turning into a “saver”… ugh …and a stock-phobic saver, at that: “Just $36 billion has gone into all equity funds [this year], down from $233 billion over the same time last year,” calculates Charles Biderman.
– Echoing an oft-repeated phrase here at the Daily Reckoning, Biderman notes that “during hard times, investors become more concerned about return OF their capital then return ON their capital…”
– Pull out your hankies and dry your eyes, Individual Investor will publish no more. A classic case of live by the bull, die by the bull, Individual Investor was nothing if not bullish, especially about tech stocks. The magazine was created and run by Jonathan Steinberg, who is more famous for being the spouse of CNBC’s “Money Honey,” Maria Bartiromo, than for his own adventures in publishing.
– Fred Hickey reminds us of the Individual Investor legacy. “Maria Bartiromo titled her August 2000 column in her hubby’s Individual Investor magazine: ‘Ready for a Rebound.’ Column subheadings were: ‘Nasdaq 6000?’ and ‘Soaring Semis.’
– “‘In the Nasdaq 6000?’ section, Maria cited Morgan Stanley analyst Mary Meeker, who was then claiming that the Internet sector had bottomed…Maria noted that Meeker liked Yahoo, Amazon.com, eBay, Cisco Systems, Broadcom, Sun Microsystems, Lucent and Motorola…”
– With the exception of eBay, all of Meeker’s recommendations lost 70% or more in the ensuing months. “My purpose is not to embarrass Mary Meeker or Maria B.,” says Hickey, “but to make the point that you’d better not hop on the train just because the Wall Street touts are telling you to.”
Back to Addison Wiggin, in Paris…
*** “There are 5 regions of the world,” said the philosopher Tallyrand, “Europe, the Americas, Asia, Africa…and Geneva.”
*** Over the weekend, my wife Jennifer and I traveled to Geneva for her birthday. It happened to be the final weekend of the annual Fete de La Genève – an enormous week- long festival in which the entire city participates. The highlight? A 2-hour musical fireworks display set to the music of Wagner, Puccini, Verdi…and Run DMC (among others).
*** Geneva, the so-called “City of Peace,” is the first of the world’s great melting pots. “Tolerance” being a major theme since Calvin brewed beer there in the 1500s, Geneva now plays host to residents from 157 countries. As if to prove the point…we stayed in a “French” hotel run by Koreans, ate Thai noodles served by Philippine women and savored Portuguese pastries while watching throngs of Arab women in full veil wander by…we wondered “Where are the Swiss?” on more than one occasion.
*** Before leaving on Sunday we toured Lake Geneva by boat. The sun was pleasant and warm. Sailboats were out in force…On one side of the lake we passed by the Baron von Rothschild’s enormous 19th Century chateau. On the other, almost directly across, we passed the little villa Lenin inhabited in 1914 while plotting the Russian Revolution. The irony, I think, was lost on our skipper, who spoke with a perfect British accent.