*AV* --- THE LETTER
Andrew,
I have been meaning to write this to you for some months. This is a
sobering and dismal review of what happens when someone like myself
invests in semiconductor companies like the ones that you constantly
cheerlead. Here is what my portfolio looks like today:
symb bought current %loss
adpt 17.50 10.69 -38.93
asyt 24.94 13.12 -47.37
bdr 15.50 8.88 -42.74 (not one of yours)
cfmt 15.31 8.25 -46.11
cy 18.19 7.56 -58.42
cymi 28.76 15.50 -46.12
datm 20.00 9.00 -55.00 (not yours)
efii 22.00 14.06 -36.08 (not yours)
klic 33.75 14.12 -58.12
real 12.96 6.50 -49.86 (not yours)
wdc 31.48 10.56 -66.45
You are looking at my entire portfolio, less a couple of small caps not worth mentioning. Last year at this time the above portfolio was valued at about 120K. Today it's about 60K. This was my purchase a new house money. Now it's my downpayment money. The loss in value represents 5-10 years of savings, gone in about 6-8 months.
I am the same person who wrote you once before admonishing you from
catching falling BYDS knives. And yes, I lost another 5K following you on that one too.
While I enjoy reading your knowledgeable banter on SI, I must be
responsible enough to warn you that you are doing REAL damage to REAL
people out here in investorland with your unbridled cheerleading of
semiconductor stocks. As you can probably tell, I am very irritated
indirectly with you for espousing a sector that appears to have little
business sense (as in dumping, over-supply, over-building, etc).
Your only consolation is that I am just as irritated with myself. Those of us who do not have your 20 years of investing experience draw our daily decisions on investing on our own past experiences in life
(outside of investing/gambling). For instance, if a house is worth 120K today, it is extremely unlikely that it will be worth 60K next year, or 250K the year after. To "normal" people the ups and downs of the prices of individual stocks look very unreal, bordering on insanity.
What got me into this mess was a shift in investor style. Around Aug
'97, after of couple of years of holding stocks in the 3-6 month range I decided I needed to get a life and spend a lot less time on SI, etc.
So, I switched to a long term investor mode and purchased some of the
semiconductor and semiconductor equipment stocks.
A month later, SEA... This was after 2 years of watching and reading
about how profitable being invested in semi companies had been.
At this point I am at a loss to know what to do. At some point I need
to move my family to a real/larger house, but it can wait for a while.
Given your 20 years of experience and if the above portfolio were yours, what would you do?
I am 50 years old. If I were to cash out today, the 60K real loss would take me 20 years, or well into retirement (assuming I am still alive) to write off in taxes.
Approximately a third of my portfolio value consists of CYMI and CFMT.
It seems like a shame to sell them for 15.50 and 8.25 respectively.
CYMI may not go down much from here, but CFMT, should I get out now and wait for even lower lows.
How long can CFMT continue to slide and how long before they have a
prayer of getting a favorable business environment.
My last question is more general and philosophical. The semiconductor
industry has made tremendous inroads into every product being
manufactured today vs 20 years ago. But, how much longer can this go
on? For instance, there comes a time when we don't need any more
interstate highways built. Can there come a time when there is no more "frontier" for chip designers to pioneer into. I think we are almost at that point today with PC's. For instance, I cannot justify adding a 6.4GB hard drive to my computer (no matter how inexpensive) because I have not filled up the pair of 2GB hard drives I now have.
So, do you foresee any slowing down of the need for semiconductor chips in the future due to loss of "frontier".
In a similar vein, assuming sufficient "frontier", if the semiconductor industry continues its current pattern of aggressive overbuilding and ruthless chip price slashing, can it ever become
responsible/predictable/boring?
I think I preferred the days when computers cost 2-3K and the computer
companies could make a profit. Below 1K, they are only eating their own shorts and destroying their own viable business futures. Sooner or later everyone will have a PC, and we will then realize that all of the interstates have been paved.
First of all, I want to apologize again for the position you are in.
The fact that you chose to go heavily into both CFMT and CYMI is good.
This advice is specifically for you. DO NOT SELL CYMI OR CFMT. While they are certainly pathetic paper losses right now, they will pay off as best as I can ascertain.
When the sector recovers, AND IT WILL, these two enabling technology companies should more than make up for some of your other losses and become winners for you. not that it is off any consolation to you but I have a bucket load of those 2 stocks and am counting very heavily on them to provide huge returns. Not that anything is funny right now but your entry prices look reverse of mine. I am in my first shares of CFMT in your CYMI price range and into CYMI at your CFMT range. I have done considerable averaging down of both of these stocks so we are in the same boat.
For the record, I own 3000 shares of ADPT at $18+ and 3000 in the $14 range. My wife has options re-priced from $40 down to $23 and a new set of options at $14 from her employer, ADPT. We believe very heavily in this company and backed it to the hilt. I sse the resignation of the CEO as a GOOD thing. Notably, ADPT is heavily tied to the SEA debacle. I am thinking of adding more shares of ADPT to my portfolio (4000 shares) at today's prices.
ASYT - my highest priced shares are somewhere close to $21, I believe.
I have been averaging down and trading ASYT on run ups over the past few months and have been playing the roller coaster on this one for a point or two. I have proabably brought this investment to just a slightly negative position but will reap the benefits when the new 200mm Fabs are built and the conversion to 300mm occurs way down the road. Once again you are in a quality stock that should have a great return on investment.
KLIC and CY were stocks I talked about but was really never gung ho on. Especially KLIC. KLIC is out of my area of expertise and was mentioned in context with TER, I believe. If anything I was more positive on TER than KLIC. Both comapnies were decimated by the SEA crisis and their eventual recovery will be tied to that recovery and the implementation of the new advanced technology. the recent announcement by INTC that they will be in production on 0.18u by the end of 1999 is a very positive sign that the move is starting to take place in the industry that will neccessitate the purchase of more advanced equipment. KLIC will rise to profitability for you or at least to break even, you just need time.
CY is a mystery. Honestly, I would not have picked that as my semicondutor IC manufacturing stock. I will assume I miscommunicated something to you that made you feel this was an attractive company. not to say it will not comeback but Honestly, I haven't been in that stock for a long time and do not see it as an investment yet. MXIM, VTSS, INTC, IDTI, and a few others would be far ahead of them on my list. As a matter of fact, CY would not even make the top 15 of IC producers for me to consider.
WDC - You really should have cut your losses there a long time ago. I do not know for how long I have been negative about the Disk Drive Sector. I cut my losses but also took profits along the way. WDC is dead money for months to come and would be my chice for a tax write off at teh end of this year. Going through my records, I cannot find anywhere that I had shares that expensive. I was selling at those prices for the most part.
There are 4 stocks on the list I highlighted that are not of my doing so I cannot comment on what to do with them.
All in all, you are screwed on 2-3 stocks (CY, WDC, and maybe KLIC) but the others can more than make up for them. Considering the housing situation and the time it would take you to recoup the losses if you went to cash, I would put off the house for 1 year and see what happens to the value of the portfolio. These stocks are at their bottom and I do not see any of the going bankrupt. They are all solid companies (that is, the ones I sommented on). They will recover nicely. This is the wrong time to bsil out. You need to hold your ground.
Waiting this long and then capitulating to themarket is how many investors do real damage to themselves. Going out now versus months ago when they were higher is a real mistake.
I guess what really puzzles me is the cheerleading part. Maybe I am a cheerleader for the semis but this sector and business is ingrained into our lives. This is a cyclical downturn and timing was rather poor. It will be a long time before the oil industry goes out of business. We will need new oil wells, oil, and gasoline for many years to come. These proucst fuel the Industrial Revolution. the semi stocks I talk about fuel the Microelectronic Revolution. Make no mistake about that. The oil industry really sucks right now but it will also make a comeback. One oil cartel embargo and WHAM BAM, long lines and higher prices. Notice that with oil as cheap as it is, the price really hasn't come down that much??? Well, I am counting on another round of Windfall prfots from the Gasoline companies and have played it that way recently.
I have always stated that I invest in what I completely understand and feel comfortable with. That is why I rarely talk about other sectors of the market. I have been upfront with my biases and my competence in certain areas. I also have stated that I play roller coaster rides and that I am prepared to ride out the storms that might come by holding for the longer term for when profitability does return. I also said that I did not time certain things real well and try to take a chunk out of the middle.
I think I have sharted my invesmtent strategy openly and honestly for those of the community that desired to learn. I know that I have time and time again provided explanations, information, insights, and comments on numerous subjects to help everyone make a more informed investment decision. My personal slant is in the tech sector. I never wanted anyone to follow me into a trade blindly but rather because they believed in the company and not just me. That makes for a bad investment decision. I most definitely have stated on numerous occasions that you must be prepared to hold for 1-2 years in the event of a reversal. I think I might have also said never to invest anything that you couldn't let sit for a year or two. Maybe I only said a year. You are about 1 year away from recouping and possibly making a killing on some of these stocks.
What also upsets me is that MIPS was spelled out in as strong a set of terms as possible. I practically put a gun to everyone's head to invest in MIPS when it got to $10/share. That was as strong a BUY BUY BUY as I get. I also telegraphd the trades, highlighted exit points, commented on greed levels, etc. from $13 all the way up to $19. I took losses on certain stocks to invest in MIPS and take advantage of this opportunity. MIPS is now closing in on a new round of buying but the price appreciation will not be as dramatically fast. This past run up was "staged" to make the ex-DMG investment banking group that jumped to CS First Boston look good. DY was not part of your portfolio and even at $30 (down $7 from the high a few weeks ago) it is close to a 200% return in less than 18 months. this was another baseball bat to the head. Forgive these two self serving successes but they were successes that were strongly brought forth and were some of the strongest words used to get people invested. Time and time again I spoke of DELL as a core holding that just keeps going up and splitting. This was one of my safest investment and I have mentioned it time and time again. DELL is up from $40 to over $105 from January of this year. Your portfolio would not be hurting as much if you followed me into some of the more strongly worded commentaries and discussions.
I am very irritated indirectly with you for espousing a sector that appears to have little business sense (as in dumping, over-supply, over-building, etc).
I believe this was very clearly pointed out via many discussions and written reports over the year. The SEA crisis started 3rd quarter last year. The SEA economy finally collapsed over years of excesses. But this will pass just as the 1987 market crash. BTW- any qulaity stock you owned jsut prior to that crash that tanked bigtime, more than made up for itself over the past 10 years. As a matter of fact, I thinkmost paerp losses were wiped out and were fantastic gains within 18 months after the 87 crash. Patience and confidence paid off.
You don't fully understand the nature of this business. This business, by virtue of how facilites are constructed and brought on line goes through Feast and Famine cycles. A typical new wafer fab will do 250,000 wafers per year. Multiply that by 300 devices per wafer and you get 75M additional ICs produced which is extremely conservative. If you understand the dynamics behind wafer diameter and DRAM complexity you see what results. The buisness is reliant on a great deal of SEA involvement for implementing new technologies and utilizing the IC output. This industry grows in step function increments and needs to have the requirements catch up with it. This industry also has a habit of continually obsoleting itself on a routine time table. Very rarely can you get the useful life out of a piece of equipment or wafer fab like that of a truck or car. Understanding Moore's Law would allow you to see the natural progression of things.
What we are experiencing now is a multiple disaster unparalleled in this industry.
1. SEA crisis brought on by falling DRAM prices and overcapacity.
2. SEA crisis brought on by poor economic and fiscal policies there.
3. The desire to move to 300mm manufacturing caused numerous companies to stall off on building or expanding 200mm manufacturing.
4. The need to spend inordinate amount of R&D dollars for developing a whole new generation of equipment to allow 300mm manufacturing.
5. Issues surrounding the transition to 300mm manufacturing.
6. Pushout of 300mm processing after a great deal of R&D money was spent.
7. Cross the lithography resolution barrier of 0.35u/0.25u forcing a switch to a new light source and wavelength of light used to resolve images. This equipment was not implemented as fast as it was desired and there were issues to resolve. On issue was the inordinately large increase in price for the exposure units themselves.
8. Market mentality that allowed the large Caps to get over bought and the expense of overselling this sector which is reeally the life's blood of our future.
At this point I am at a loss to know what to do. At some point I need to move my family to a real/larger house, but it can wait for a while. Given your 20 years of experience and if the above portfolio were yours, what would you do?
Not to sound callous but you have no faith in this sector of the economy, the semiconductor sector. With lack of faith there is no confidence and most assuredly no level of comfort in this arena. If it were me, I would hold onto the stocks I mentioned until their prices rose sufficiently enough to cover all the paper losses incurred to date and then exit this segment of the market for investments you feel more comfortable with. You need to ge able to sleep at night. Also, I would bite the bullet and prepare to put off the new house until late 1999 or early 2000. I think, at the latest, this will be when your portfolio should be back up to its previous value and then some.
From that point on in time, please do not invest in any stock you do not feel confident and comfortable with. This is extremely important and is a cornerstone for success.
Do not write off most of these losses. You really need to wait for the recovery.
My faith and confidence has me buying BYDSQ all the way down to $1 and then buying oodles of shares at $0.10-$0.14 because of that faith. I sold out at $0.43 recently at almost 3X profit to minimize the other losses over the past year. I played some of these swings to recoup some losses. My problem is that the high priced shares of BYDSQ are still in my IRA account so all the profits made are in my taxable account. I have massive losses in that IRA.
The semiconductor industry has made tremendous inroads into every product being manufactured today vs 20 years ago. But, how much longer can this go on? For instance, there comes a time when we don't need any more interstate highways built. Can there come a time when there is no more "frontier" for chip designers to pioneer into. I think we are almost at that point today with PC's. For instance, I cannot justify adding a 6.4GB hard drive to my computer (no matter how inexpensive) because I have not filled up the pair of 2GB hard drives I now have.
I will go on beyond both of our expected lifetimes. This is a question for your grandkids to worry about. Computers will get smaller and smaller and they will become more and more a part of our lived. We will moveinto the Geroge Jetson arena of computerized houses, videophones, etc. The brand new field of MEMS is still inits infancy. If nothing else, the semiconductor industry may give way, at some point down the road, into integrated MEMS (Microelectromechanical Systems).
MEMS will be used for a host of sensors: Acceleration, Pressure, chemical, biological, electrical, stress, etal.) and the very first implementation is een everyday on the form of the accelerometrs used in the automobile airbag system. AMD is credited with the First commercially successful integrated MEMS device coupling an accelerometers in on the sample IC chip.
As far as storage devices are concerned, I have a tendency to agree but I am about to add anothe 6.4 Gig drive to my system. I do a great deal of literature research on stocks off the internet. I do find that these stories get deleted after a period of time so it is up to me to archive those of importance. However, as we move towards DVD technology and eventually creating a system that is actually our telephone, computer, radio, TV, VCR, camera, stereo, and educational reference library, you will see the need for more and more storage.
And do not think that is not what is going to happen. We have digital cameras, videoconferencing off the PC, TV and radio add in boards, High end graphics accelerators, expensive sound cards and speakers for the PC, Large Flat panel Displays, 31" monitors, and DVD drives that can play DVD movies as well as record sound and data. Not to mention the PC games and Internet access that gobble up storage space.
It seems that no mater how large the storgae device is, people seem to be able to fill them up to the max. The semiconductor industry is a long way from dead. In the life span of a human, I would say we are just about getting potty trained now.
In a similar vein, assuming sufficient "frontier", if the semiconductor industry continues its current pattern of aggressive overbuilding and ruthless chip price slashing, can it ever become
responsible/predictable/boring?
You only see the commodity side of the market. DRAM, EPROMS, SRAMS and maybe even CPUs. However, even with falling CPU Prices, a new genration of CPU comes out with a high price tag. New gernation of DRAMS come out with slightly lower margins than it predecessors but enough to make good profits if you are first to market. INTC is so successful since it garners outrageous margins for its CPUs due to lack of real competition. What you do not see much of is the non commodity business, the ASICs (Application Specific ICs). These garner sime real high margins since thes ICs are usually sole sourced and designed for specific applications and customers. Sort of 1 of a kind sepcific to the specifications of a certain customer. This is wehre the real money is since it is low vloume high mix. Not many of the DRAM producers have the ability to run high mix and low volume of hundreds of different products. Furthermore, the IC chips themselves may get cheaper and cheaper as you said but the end use of those chips seems to garner real nice margins. The ADPTs of the world take these cheap chips and some ASICs they design, and place them on circuit boards to create certain functions or peripheral products. These products carry high profit margins until competition comes in. Then they move onto better mousetraps with higher margins.
Disk drives and DRAMs are commodities that will never see the high margins or profits in the future. They seem to be following the SONY Trinitron Color TV paradigm. Same basic price every year to buy it but each year brings with it improvements in functionality or performance.
With all the cutthroating going on in this buisness, there will be survivors and casualties. TXN is a casualty of the DRAM business since the practically and literally paid MU to take their DRAM business. MU was mentioned either here or the other place I am now visiting as a good gamlbe since it was seeing positive leadtimes in its 64 Meg orders. I know I spoke about it at 25.5 and it is now 34 in a heartbeat of days. The last big DRAM dumping wars of years past allowed the culprits to drive people away from the business, allowed them to choke the pipeline, and then raise prices to pillage the village for awhile. Much like the oil embargo type of stuff.
I do not think I will ever get back into Disk Drive sector stocks. I do think I can take MU for a few more points. However, it does not mean much to me what the IC or Board margins are going forward since I am more focused on the equipment providers these days. Eventually equipment wears out or the technology becomes obsolete, forcing upgrades or replacement.
You do not have to eat fast foods at MacDonalds, Burger King, KFC, etc. since you can pack a sack lunch or eat at home. You do have to replace or repair your automobile every so often because it is unrealistic to expect most people to travel by bus, train, or plane to do our daily buisness and take care of dsily activities. That is just my opinion.
I think I preferred the days when computers cost 2-3K and the computer companies could make a profit. Below 1K, they are only eating their own shorts and destroying their own viable business futures. Sooner or later everyone will have a PC, and we will then realize that all of the interstates have been paved.
Even with the sub $1K PC companies like DELL, CPQ and GTW seemed to be making profits. They are putting it to their suppliers like WDC, DIMD, INTC, etc. to reduce the cost of procuring these components. None of these comapnies have a vested interest in the components themselves and trest them as commodities. true, the PC is now going to be a commodity, but they have somehow managed not to allow significant erosion to take place in their earnings. This may happen down the road but it will be a long time before everyone has a PC. And even when we reach that point, we will have moved on to the next upgraded system or next use of the same components elsewhere.
Just a goofy for instance: Digital answering machines. When the PCMCIA hard drives reach 11.O Gig in capacity why not incorporate it into some type of answering machine. Heck, why not interface your phone into the PC to allow you to use the PC as your answering machine. Wait a second, WE HAVE THAT ALREADY, don't we??? Speakerphine modems!!!!
Again, I was deeply disturbed by your letter to me. So much so that I lost sleep over it and have spent from the timestamp of the original message this morning until now writing this response. I have done this during market hours and maybe to the detriment of some trading opportunities. However, I meet things head on and felt this was more important. If I missed any oppportunities, well, that was my fault and my decision. I will not back away from your comments nor will I try to bury them and make as if it was of no consequence to me. I think it was important enough to air all this out in the public eye for everyone to scrutinize. I have left out your name so as not to give any hint to your identity.
Again I apologize for apparently leading you to slaughter. Timing and a poor choice of stocks to follow me on is part of the problem. Another part was possible a matter of faith or understanding and confidence in what was going on. But as far as I am concerned, Thank goodness 1/3 of your portfolio is invested in stocks I consider well worth owning and ones that could make up for the present hardship over the next few quarters.
Respectfully and Apologetically Yours,
Andrew Vance |
