Interesting article on Gilder in today's Washington Post...
Market Guru Put Acolytes On Wild Ride
By Fred Barbash
Sunday, March 5, 2000; Page H01
Have you heard of the Gilder Effect?
It's a form of momentum madness that overcomes a stock after it's endorsed in the Gilder Technology Report. Published by techno-visionary George Gilder, the newsletter influences some investors so much that they jam up its Web site to get it early each month and then race to buy whatever company Gilder extols.
The result is instant run-up--20, 40, 50 or 60 percent. No analyst I'm aware of can match the Gilder Effect.
The report itself is good. He's a predictor--with an excellent track record--of technological ascendance and decline. I've subscribed to his newsletter for some months.
But I'd never fully experienced a Gilder Moment until Feb. 17, when I took an unusual step and joined the throng myself to better understand and be able to write about this strange phenomenon of a phenomenal stock market.
Before describing the experience, I hereby stress that I do not normally live this dangerously and am generally restricted, as a Washington Post financial columnist, in the kind of trading I do. I do not endorse what I did. Don't do it.
The Gilder Technology Report, $295 per year, is distributed mid-month, online and then by mail. I had been briefed by a veteran Gilderite about my mission:
* Get to his newsletter on the Internet.
* See if Gilder has added a new stock to his list.
* Buy fast.
The idea is to do it before the snail-mail subscribers know what hit them.
Gilder facilitates this by sending out an e-mail the day before publication announcing that it will be available to password-equipped subscribers by late morning. A second e-mail arrives the next day.
I got mine at precisely 11:57 a.m. on Feb. 17, informing me that the report would be accessible around noon. I went on Red Alert. I loaded one computer screen with www.gildertech.com and pointed another to my online broker.
Noon arrived. I clicked and got on the site. But there was nothing new there. Five minutes went by. I refreshed. Still nothing new. Refresh. Nothing. Refresh. Nothing.
On about the fifth try, I could no longer access the site. It was jammed. The rush had begun.
After three dozen or so more clicks to refresh, I had the newsletter and George Gilder's latest article. There was a new company there:
Xcelera.com Inc. I'd never heard of it.
I hastened to his lead article--"The Post Diluvian Paradigm"--to get some idea what the company did. The article was about an Xcelera subsidiary, Mirror Image, and claimed that it had developed a "superior" technology for Internet content distribution. That's the business of companies such as Akamai and Digital Island. They accelerate Web pages to end users so as to avoid bottlenecks like the one I had just encountered.
It's big. Over to E-Trade I went.
Xcelera--ticker symbol XLA--was selling for $129 a share. As a curious colleague sitting next to me looked on in horror, I placed an order for 100 shares at whatever price I could get.
I waited. No confirmation. Nothing happened.
I rushed over to the Bloomberg terminal in our office, called up XLA's quote and learned that the American Stock Exchange had temporarily halted trading in the issue because of a trading imbalance--which generally means, in a situation like this, that demand has overtaken supply.
The rush had become a crush.
I knew trading would soon resume--it always does--but at what price? I was shaken, thanks in no small measure to my frantic colleague, who was moaning at my side: "What are you doing? Oh, my goodness. What is this going to cost you? What have you done?"
"I have no idea," I said.
"What does the company do?" she asked.
"I have no idea," said I.
Just then, the logjam broke. I was notified that my trade was executed--hideously--at $200 a share. That was 61 points higher than when I ordered. And I was one of the lucky ones. XLA had peaked at 215.
George Gilder is a well-known supply-side economist, author and technology futurist who began publishing his newsletter in 1996. He notes in his "special report," called "Grow Rich on the Coming Technology Revolution," that he predicted early that PCs would displace mainframes and that the CDMA wireless protocol would emerge ascendant over competitors.
Last year, his focus on what he calls "The Telecosm"--bandwidth, data storage and fiber optics--produced a market return, by his calculations, of 268 percent, with Qualcomm (QCOM) and JDS Uniphase (JDSU) leading the pack.
How much Gilder personally profits from the stocks, I don't know. The newsletter notes that he and his staff "may hold positions in some or all stocks listed" in the newsletter.
Early on--pre-diluvian, I suppose--Gilder's stock picks tended to appreciate gradually. You could read the newsletter at your leisure and then take some time for independent research.
But as word of his influence has circulated--by word of mouth, on the Web and in the financial press--his choices have rocketed upward within an hour of his report's appearance online.
Last July, NorthEast Optic Network (NOPT) gained 67 percent on Gilder's recommendation. In December, the lucky company was Globalstar, which doubled. Terayon (TERN) takes flight every time Gilder mentions it, which is often. All are roughly in the same business--moving data quickly, Gilder's special focus.
Xcelera closed Feb. 16 at $129, on volume of 79,900 shares. On Gilder Day, it closed at $190, on volume of 928,300 shares. On the 18th it hit $240; on the 22nd, $270. It closed Friday at $325.
I got out at $240. I'd had enough. My experiment was complete.
Such leaps are not uncommon these days. But what is Xcelera anyway? In the last report it filed with the Securities and Exchange Commission, for the fiscal year ended Jan. 31, 1999, it reported earnings of about $3 million. That wasn't from its technology, though. The earnings came from real estate activities.
The SEC report said Digital Mirror--which created all the market excitement--was a start-up that "did not have significant revenue."
After the mid-February burst of buying, Xcelera's president, Alexander Vik, appeared on CNBC, where he was questioned about the company's number of U.S. customers. "I don't know the exact number in the U.S.," he said. "We have about 50 networks running traffic on our network."
When I talked with Vik last week, he said most of his customers were in Europe, though the company has built five access points--for storage of Web content--in the United States.
I don't doubt that it's a respectable company with potential. I talked with competitors last week and they don't doubt it, either, though they and others took issue with Gilder's claim that Xcelera's technology was dramatically better than theirs.
But consider this: The stock price of Xcelera has appreciated roughly 50,000 percent in the past year. I kid you not. Adjusted for splits, it's gone from 66 cents to $325. It ran up before Gilder got to it, thanks in part to articles by one of the kings of momentum trading, Jon D. Markman of Moneycentral.com, who suggested on two occasions that it could be a "potential 10,000 percent gainer."
So it's already a 500 bagger. That's more growth than Dell Computer experienced in the past 15 years, more than Yahoo since its founding. The growth rate of XLA's stock price in a year is Microsoft's over 15 years.
Does this make any sense at all? Of course not--and I'm a tolerant man when it comes to stock valuations.
What do I conclude? I don't like it, either as a participant or as an observer. It distorts reality. It wildly exaggerates value. It makes stock choice more dangerous.
Gilder, of course, is not responsible for the buying habits of his readers. But his report does encourage the frenzy in its Web site pitch: "Be the first to know which companies are on the right track. . . . Profit from the biggest investment opportunity of all time. . . . Discover the companies that will play leading roles in the bandwidth revolution and watch their stock prices soar."
I do also wonder about his hype about how we can "Grow Rich on the Coming Technology Revolution." And I do wonder why he says nothing in his report about the previous run-up of Xcelera--from 66 cents to $129, over the year. The Wall Street Journal asked him a similar question recently. He responded: "That's not my job. I don't do price."
There was a contradiction in Gilder's description of Xcelera as well. First he said Mirror Image has 32 content-access sites around the world. Then, three paragraphs later, he said that Vik plans to spin off Digital Mirror from Xcelera "in an IPO that can finance the creation of the full thirty-two" sites.
I tried to talk to Gilder last week, but his assistant said he wouldn't be available until April, if then.
It seems to me that now that he knows what's going on, he ought to at least alert his readers to some fundamentals.
What began as a voyage of intellectual discovery for the Gilder Report has become momentum madness for those who trade off it. It is clearly possible to profit in the short run--as I did, to the pretax tune of $3,964--and perhaps also in the long run.
But tread cautiously when considering stocks that have been mobbed--or Gilderized. That's what I learned.
Fred Barbash can be contacted at barbashf@washpost.com. |
