Michael,
I thought you might enjoy seeing Cramer come up with a new rationale for the greater fool theory. It basically goes: the CEO of Cisco paid $7 billion for Cerent, and he is a genius, so it must be worth a lot more than $7 billion, which means all these absurd valuations are real!
My god, what next?
/Kit
Cramer on the Discovery of the New World
By James J. Cramer
12/24/99 8:31 PM ET
When the history is written about the stock market, we will remember 1999 as if it were 1492 and the New World had just been discovered. No, I'm not being hysterical or dramatic -- I save that for the TV persona. In fact, I even know the date the New World was discovered: Aug. 26, 1999.
Almost everyone reading this story at this moment has no idea why one day we will celebrate that date as if it were Columbus Day. John Chambers knows. So do Mary Thurber, Larry Carter, Don Listwin and Kevin Kennedy. You'd better learn those names, while we are writing history. Those are the sailors on the Nina, Pinta and the Santa Maria. They are the Cisco (CSCO:Nasdaq - news) execs who took us to the New World when, on Aug. 26, 1999, they bought Cerent, a brand-new company, two years old, with only 287 employees. They found the New World when they issued 100 million shares for this drawing-board company that makes next-generation optical transport products that take, symbolically and literally, Old-World communications companies and their voice connections into the New World of voice/data transference over the Internet.
Big deal? You bet it was.
On Aug. 26 this year the scales fell from our eyes. Before the discovery of the New World, we thought, at Cramer Berkowitz, that this whole crazy Nasdaq thing was just a big bubble, blown by the good folks at Janus and Amerindo. We figured it was simply the work of the Greater Fool theory. I guess you could say that we thought the stock market was flat. Now we knew it was a globe!
With this purchase, worth $7 billion in a stock that this decade appreciated a lot more than the U.S. dollar, all of us who believed that the Nasdaq was just an aberrant bubble were proven wrong. Why was this purchase so seminal? First, let's establish a benchmark. I have never hidden my desire to try to relate this stock business to sports. I do it because I look at the guys who run these businesses that have made me a ton of money as if they were the real heroes, not the spoiled bums of pro sports. The Gehrigs and the Ruths of this era wear Cisco jerseys or Intel (INTC:Nasdaq - news) sweats. They play in Sun Micro (SUNW:Nasdaq - news) pinstripes or sport Yahoo! (YHOO:Nasdaq - news) hats or Microsoft (MSFT:Nasdaq - news) helmets. And, in case you doubt the veracity of my case, how much money has Tim Duncan made you? Or John Rocker? Or Derek Jeter? Now we are on the same page.
So when someone from my personal pantheon, who has shepherded his stock to the front of the line during this era, shells out $7 billion of his closely guarded treasure for a newcomer, it forces me to re-evaluate my negative stance.
Chambers, you see, paid that much because he knew that the stock market would value Cerent much more highly if it came public independently and he would never get its technology, which might hold the key to tens of billions of sales in the out years. You could say that the stock market forced Chambers' hand. If Chambers -- who knows more about what makes a start-up company worth billions than just about anybody who has ever lived -- believed these valuations aren't going away, then who am I, a lowly stock-picker, to disagree with him?
Chambers had discovered and verified the New World with this purchase. Perhaps he had seen that he could have bought Redback (RBAK:Nasdaq - news) or Brocade (BRCD:Nasdaq - news) or Juniper (JNPR:Nasdaq - news) (and yes, I am long all three because of this move, as I would not have been before it) for billions in stock and looked like a genius in retrospect. Perhaps he knew that he had to have this technology to be a winner and that meant shelling out his most precious currency. It really didn't matter. As we former historians know, trying to figure out the psychology behind why Lincoln did this or Franklin D. Roosevelt did that is a futile task best left for the lightweights.
What mattered is he did it. And with that, all of these crazy valuations became validated valuations. And all of these stocks that we were ignoring became must-owns.
I know I'm not the only one who feels this way. The tech funds all got it. As did Amerindo. As did Janus. But everybody else? They're still living in 1492 in my book. They still think the world is flat. Which is why, when you pick a fund, or a stock, ask yourself: Are these guys believers in the Old World or the new? If they are believers in the latter, then they might look back and say, yep, 1999 was the year Chambers and company sailed the ocean blue and discovered Cerent, forever changing the way we look at the stock market.
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