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To: Sarmad Y. Hermiz who wrote (104224)	5/27/2000 2:45:00 PM
From: Bill Harmond	Read Replies (2) \| Respond to of 164684

I think it's hard to keep this correction in perspective unless you participated in the run-up. Otherwise it seems like a disaster. The numbers are certainly stunning, but this industry's investment pattern gives fits and starts a new name. I'm down 62% since March 10, and have given back 2x what my net worth was last Fall. But I still have what I had last Fall, and that is up 20x in four years. Sure people bought at the top (including many short-sellers), but net-net far more money has been made until yesterday by public sharholders on the long side. Far more. A 60% decline is a tradable move. No question about it, but that's great and easy in 20:20 hindsight. I believe that the Internet hasn't come near reaching it's economic potential; and therefore I don't believe that public investment into this industry peaked last year or this year. Take the US alone, by far the earliest adopter of Web technology: On the consumer side until now we have only seen the partial penetration of narrowband (vs. eventual universal broadband with all it's content implications), no wireless Web at all, and in the just the past six month only the beginning of B2B experimentation! None of that spells maturity. Comparing Internet stock potential to human physical growth potential doesn't work for me. There are so many fundamental difference between the two. For example, what about network effects...the reason that Microsoft, AOL and Yahoo have become such giants? Lastly, go back through the charts of industry shaping companies like Home Depot, Wal-Mart, Microsoft, Cisco, etc. You will find periods (even during rapid expansion) where the stocks went sideways for a year or more. That is typical, not exceptional. Victor has now posted that the Internet is basically a toy, so he and I are on different planets. There is no sense trying to debate that chasm, but your point makes far more sense to me.

To: Sarmad Y. Hermiz who wrote (104224)	5/27/2000 3:54:00 PM
From: Wizard	Respond to of 164684

Sarmad, William: I find your discussion highly interesting. I pose the following question; With 20/20 hindsight, what were the appropriate valuations for the core networking companies in 1990-1993? Wellfleet, Synoptics, Bay Networks, 3Com and Cisco Systems. From 1990-93, all of these companies were in hypergrowth mode, all had high valuations and their stocks went straight up for 3 years. They all corrected sharply in 1994 and then were good investments again for another year or two. Not until years after early 1994 (the first bad correction) did the 'me-too' companies become apparent. What about Spyglass, Netscape and AOL in 1995-1997? All had similar growth profiles and all went crazy up until AOL finally took 98% of the market cap of the group. The question is how do you value a company with a 1 in X chance of a 9-figure market cap (or a high 8-figure market cap for that matter). Cisco went from IPO in 1990 to largest market cap in the world in 2000. This is simply incredible. The story just got better and better and then the internet came around and it got exponentially better. Now I am down a larger % off my March 10 high than I thought a correction would bring but my cost basis on my stocks puts it all in perspective. Its single digits in names like INSP, BVSN and VIGN and despite 70% corrections in these stocks (a very substantial %), the simple trimming of these positions after 5-10x moves has generated more reinvestment dollars than all of the poor decisions made in 2000 (defined as going long anything since March). The key is that the only way to survive in the world of network effects and increasing returns and crazy volatility is to actually buy the company that gains 10-30x. If you don't do this, this is not a good space to be in... So what was AOL worth in 1995? With hindsight, I believe it was worth its current market cap discounted at a rate that was achievable, say at the rate of the overall NASDAQ (25%ish/year). This implies that AOL was worth an astonishing 4-figure revenue multiple if you go back a few years. What was YHOO worth in 1996? 10,000x 1996 revenues? What were JDS Uniphase or Veritas Software worth in 1997? Certainly triple digit revenue multiples if using 20/20 hindsight. All of this wealth has skewed how investors view valuations. 'Network effects' are simply another way of looking at the power of compounding. Compounding growth is not a linear phenomenon. Like an option payoff, the downside case is the price of the premium and the upside case is assymetric. Assymetric payoff profiles are very difficult to value because they are not 'normal' distributions. I suggest anyone who attempts to play in these stocks use disciplined portfolio strategy. Do not use heavy leverage and be patient and keep the power of compounding on your side. Figure it takes 'many' quarters of growth to build an 8 or 9 figure market cap so use the quarterly reports of the companies as times to 'average into' the best and get out of those who aren't going to make it.