*** Is Dell a growth company?
*** Big news tomorrow...a bigger rally ahead?
*** Cash machines down and out in Paris...
*** Not much action on Wall Street. Dell announced its
latest figures -- which, as always, "were better than
expected."
*** But William Fleckenstein says that, "if you backed
out non-operating income and then adjusted for taxes,
you'll find that Dell made 16.4 cents versus 16 cents
last year." This is a growth company? What justifies a
P/E of 70?
*** The PPI figures -- which shed some light on inflation
at the wholesale level -- came out, too. They were
benign, showing the price of energy down by 4%. But the
same day, the price of oil rose to nearly $30.
*** So the market didn't have much to go on...and didn't
go very far. The Dow rose 63 points. The Nasdaq went up
29 points.
*** There were 1,593 stocks advancing; 1,325 declined.
There were 82 stocks that hit new highs, while 75 hit new
lows. I continue to report these numbers, but the clear
pattern has disappeared.
*** Hanging over the entire affair is the threat of a
rate increase by the Fed tomorrow. Greenspan is widely
expected to raise rates by 50 basis points. A Reuters
headline tells how even this is spun as good news: "Big
Hike Seen Bringing Bigger Rally." The logic of it is that
a 50 bps increase will put the Greenspan Fed "ahead of
the curve." The bad news will be over. (Don't count on
it.)
*** The two largest IPOs in history are now both below
their issue prices -- AWE and Palm. Palm is 84% below its
first day high of $165 -- set on March 2.
*** Another big IPO -- the Dutch Internet service World
Online -- fell from a flotation price of 43 euros on
March 13 down to 16 euros on Friday. In a move that I
predict will become more and more fashionable --
shareholders are suing the issuers.
*** The hurdle is being raised. "It's getting tougher and
tougher for smaller companies," said one analyst quoted
by Reuters, to raise money. "There's a lack of liquidity
and demand for those deals; the market is really
squeezing the smaller issuer."
*** The cash dispensers didn't work in Paris over the
weekend. Y2K strikes? A hacker in the system? A high tech
breakdown? Nope. Turns out, the digital economy is
vulnerable in an unexpected way. Someone has to stock the
machines with cash. And the union that represents the
cash handlers went on strike.
*** Let's see...what else is going on in the world?
I'm sitting in the first class section of the Eurostar on
the way to London. When I began making this trip a couple
years ago, the cars were almost empty. Now they're full.
All businessmen.
*** The English newspapers are disappointing this
morning. Not much happening in Britain, I guess. I've
heard of people not getting enough slack, but here's a
story about someone who seems to have been cut too much.
An unfortunate American went bungee jumping in
Switzerland. He went right to the ground without even
slowing up.
*** And here's a story about a pair of gay guys who got
some woman to have a baby for them. Turned out, she had
twins...now they've got a pair of twin girls -- Aspen and
Saffron -- who were baptized on Sunday.
*** There's still time. This Wednesday The 15th Annual
Premier Offshore Advantage Seminar begins in the Bahamas,
and runs through Sunday (May 17-21). Enjoy the sunny
Bahamas and learn about tax-deferred earnings and
financial privacy. Only two days left, so if you're
going, you better make arrangements. Send Michael
Whitstine an e-mail at mwhetstine@agora-inc.com right
away.
"Should we, like Buffett, simply not buy stocks that we
can't value? Isn't that a bit naive, to simply not take
any risks on companies or ideas that could realistically
have a huge earnings stream? Consider Yahoo. From the
very beginning this company was a potential blockbuster.
Gross margins of 86% and almost zero capital cost."
Lack of earnings history and high prices make the typical
Internet stock inappropriate, if not abhorrent, to a
value investor. But does this mean that value investors
are doomed to miss out on all new tech opportunities?
To make a long story short, the answer is, "yes."
In fact, Internet companies are not only out of reach of
value investors -- they are beyond the reach of any
serious investor.
But the lure of great wealth, near the peak of a mania,
is so strong that most people find it impossible to
resist.
"The mark of a mania is when the general public senses
that it has been left out of the cornucopia," writes Gary
North in a recent letter. "They begin to get frantic,
looking for a way to get onto the one-way road to Easy
Street. They follow the trends. They buy whatever has
already gone up by three or five to one."
It is not merely by mistake that these "investors" lose
money...it is by design. That is the way the system
works, in other words. For it to end up any other way
would be an affront to the money gods...and a challenge
to human nature.
An investor bidding on an Internet stock may feel that he
is playing on a level field. And maybe it is level...like
a marsh. You sink down a little further with each step
you take, until there is no hope of ever getting out. All
investors, though, get the same treatment.
Tech stocks are widely thought to represent the wave of
the future. Jim Davidson has written that it is only by
betting on these "New Economy" companies at a very early
stage that one can hope to get rich by investing. Others
have complained that if you try to apply "old-fashioned"
investment approaches, you'll find yourself sitting out
the biggest wealth explosion of all time.
Of course, whatever dynamite there may be in the Internet
revolution, it has yet to detonate. But it may someday.
And the genome project may produce huge, almost
miraculous benefits. Even so, could an investor put in
money with a reasonable hope of a return?
Professor Hal Varian, dean of the School of Management,
UC Berkeley, maintains that there are five stages in
technology revolutions: experimentation, capitalization,
management, hypercompetition and consolidation. "We are
probably in stage two of the Internet revolution," writes
Gary North. "In previous revolutions, the
hypercompetition can last a decade or more. Example: the
reduction of the telegraph companies, 1855-61 -- 88%. It
happened again to the large electrical companies later in
the century: 87%."
"The odds are that the typical investor will not be
heavily invested in the 10% to 15% of the Internet firms
that survive. He will also have bought in late. Easy
Street is always a dead-end road for most investors..."
So, if you were a serious investor, and you were able to
calculate a reasonable price for a start-up company --
that is, what the company would be worth if you expected
it to succeed -- you'd have to discount it by 85% or so.
However, it is almost impossible to figure out how much
it should be worth. There are two many unknowns. Each
opportunity requires much more intense study than an
"investor" can give it.
That is why these deals are typically given to
speculators to fund, not investors. Speculators usually
specialize in a given area -- say biotech -- and get to
know the area well. They are able to calculate the odds
of success of a given project - roughly -- and negotiate
the terms of their involvement so they have a decent
chance of making money. They know that most projects will
fail. So they make sure that each investment they select
has huge upside potential.
This is what Jim Davidson and his team are doing in the
high tech area. It's what Doug Casey has done for many
years in the mining sector. But it is clearly not
"investing" in the normal sense of the word.
The average investor has neither the information, the
training, the expertise nor the temperament for real
speculation. He is so far down the financial food chain -
- below the promoters, founders, entrepreneurs, venture
capitalists, brokers, touters and smooth-talkers -- that
he is almost certain to be swallowed whole. For not only
has he no way of separating a good speculation from a bad
one, his inability to do so almost guarantees that the
deals he is offered will be bad.
Gresham's Law operates in the world of Internet stocks,
too. It is easier to create bad companies than good ones
(they have fewer requirements). In a market that can't
tell the difference, Gresham's Law predicts, the bad ones
will push out the good ones. Soon the only ones available
to the average investor will be bad ones.
That has already happened. Even good Internet stocks --
assuming there were some -- rose to such levels that they
were bad for whoever bought them. Even experienced
speculators -- such as Julian Robertson -- lost money on
them. Can the average investor hope to do better?
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Last modified: April 02, 2001
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