We spent a good part of last week in San Francisco and the Silicon Valley in
the midst the of internet stock downturn to get a "quick" assessment of what
some of the "pro's" were thinking. We met (in order) brokers, venture
capitalists and students (of which any one could be worth a billion...in a
couple years).
First in San Francisco, the mood was so gloomy among the brokers we met, we
felt we should put every penny into the market, as any good contrarian would.
The primary problem amongst the brokers was A) an over concentration in the
"big" names, B) position building, C) position building on margin and D) the
complete inability to give any rationalization to their clients to take losses
due to "deteriorating fundamentals," because the recommendations were never
based on the fundamental characteristics of the companies in the first
place.
A) Over Concentration In The Big Names.
What this means is the brokers tendency to buy the "big names," to lessen the
chance of being sued by a client, in the event this entire Internet craze does
in fact turn out to be a bubble. The defense being, "well it was AOL. Every
major institutional investor in the country owned AOL. We all took a bath."
Everyone we met seemed to own the following and little else.
Name/Symbol/ % Off High That Day
America Online (AOL) Down 50%
Amazon.com (AMZN) Down 60%
AtHome (ATHM) Down 65%
EBay (EBAY) Down 68%
Yahoo (YHOO) Down 50%
B) Postion Building.
Some of the most successful brokers we have met and/or dealt with are
"position
brokers." In essence what they do is pick their favorite stock and
recommend to
everyone and everything that moves. They live and breathe the stock, meet
management, follow corporate events on a daily basis...in short, they know
everything you could possibly imagine about the stock. They buy it day in and
day out until they amass huge postion of 100's of thousands of shares and
sometimes millions of shares. They typically do that with three maybe four
stocks at any given time. The game plan is when they eventually get out, in a
year or two (hopefully at 2-3 times what they paid for it) and then roll the
proceeds into their new favorite stock, they have a commission payday running
into the 100's of thousands of dollars.
This works most favorably in stocks which during downturns limit their loss to
15 or 20%. The problem with the strategy is when the position turns south
40 or
50% (generally rare). Then it becomes a situation of where the broker dreads
coming into the office. They find themselves buying the stock for new clients
and selling it for "old and departing" clients. Let's look at the reality. A
guy gives you $100,000 and then in two months it's worth $50,000 is not a
happy
camper and has little interest in investing in his second favorite idea or
chatting about golf scores.
C) Position Building On Margin.
Well...considering the performance of the widely held (by broker) Internet
stocks, this is sort of self explanatory. Now the broker comes to work
everyday
to meet an onslaught of margin calls. The back office is on his back, the
office manager is telling him if the money doesn't come in, it's coming out of
his paycheck, the clients aren't answering his phone calls. We can't tell you
how many times that when we have been in brokerage offices when this was going
on (all the brokers having glum faces) and it was the absolute signal to buy
whatever that firm was selling to meet margin calls. It's morose, but it
works.
D) Not Taking A Loss.
Any good broker can call a client when a company reports less than expected
earnings and tell him, "we made a mistake, let's take our loss and get
out." We
once remember getting a call from a broker to bail out of a Mexican restaurant
stock because the rising price of avocados was wreaking havoc on the
restaurants margins (for real). We didn't get mad, how was the broker supposed
to know avocados were going to double in price. But it is an entirely
different
event for a broker, to call a client and advise the client to take a loss
simple because it's...going down (even though that is the right thing to do).
They're just not trained to do it.
We would say we probably reached an inflection point Friday. In fact if not
for
Friday's action (which could be reversed Monday) we know of a number of
million
dollar brokers who were about to leave the business. It was that close. And
that of course is the absolute best time to buy. That if history is any
indicator.
Friday:
America Online + 4 1/8
Amazon.com (AMZN) + 5 11/16
AtHome (ATHM) - 2
EBay (EBAY) + 6 5/8
Yahoo (YHOO) + 4 7/16
Cruising down to Palo Alto found much more level headed thinkers (the venture
capital people)--and a much shorter story. We'll sum it up this way. If they
never take another deal public (highly unlikley) it doesn't matter. The
historic cake has been made. If an Internet company does go public and trades
flat or slightly down--contrary to poular belief--it's still time to pop open
the bottle(s) of champagne. It's just that they got to do it behind doors.
Here's how one VC explained it. He said, "take a look at the Cobalt Group
(CBLT). They design web sites for car dealers. It ws priced at $11 and traded
to $8. The company had sales of $6 million last and lost $8 million. You think
they're crying. Let me clue you in on something, they raised $49 million. Do
you think we could do that for an apparel maker or a restaurant chain ? They'd
be lucky to raise $2 million, and I'm being generous. Forget what the stock
did, they raised $49 million, and they now have a currency (their stock) to
buy
other businesses. If they're crying, it's all the way to the bank. It's a
beautiful thing."
Over at Stanford, and we'll make this real short, these kids think a $100
million dollar net worth is a sign of failure. |
