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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: flyboy who wrote (10800)	6/28/2000 6:43:00 PM
From: James Clarke	Read Replies (1) \| Respond to of 78525

Expected some controversy here. I lost a lot of money shorting Amazon, but that is sunk now. What is important is what made me cover at 70-80, which of course was also a mistake in hindsight. But what made me question my assumptions was the following: 1) They are the best in the world at what they do. I am a delighted customer. 2) What they do is growing like a weed, but others who do what they do are dying 3) Internet retailing is a lousy business model as long as people are throwing capital at it, but thats not the case anymore. If anybody is going to emerge as the Walmart of this business, we know who it is. My plan was to cover Amazon and short another internet retailer - EToy was the one I had in mind. That would have been a great trade. Unfortunately I only did half of it. So now with Amazon down 60%, but with the story better (the plunge last week on the "news" about the balance sheet was nothing new to anybody who had been short the stock before. I know the balance sheet has problems and that they are burning cash.) But... 1) Amazon's pricing is clearly up at least for their core product of books. 2) The fear that they would have to price to the lowest common denominator turned out not to be true. As a customer, once I wasted 45 minutes trying to execute an order at Buy.com I stopped going there. I have never once had a problem with Amazon's website or delivery. They return an e-mail within 24 hours. These guys are very good at what they do. Now as for valuation, that is tough. I see an exponentially growing retailer trading for about 5 times this year's sales. Bezos said today he thinks they will be operating cash flow positive this year. The warehouses have been built, so cap-ex should fall. And they've got a billion dollars in the bank for a rainy day. They are not profitable, but they should be. That's lame, I know. But if they do turn cash flow positive, then make a dime of profit, the stock will explode. Bill Miller of Legg Mason Value Trust has not sold a share of his position. In fact he started buying aggressively again this week. His logic is that this could be a bankruptcy. There is no margin of safety here. But he thinks in terms of probabilities. If it is not a bankruptcy, you stand to make a lot of money. 3x, 5x, 10x, whatever if this is Walmart in 1979. I know three things. I know Bill Miller is a great value investor who makes his biggest money on ideas other value investors ridicule. I know that he knows this company's economics as well as anybody. And I know that he is buying at this price. I wouldn't make this 10% of my portfolio - there is clearly downside risk. But it seems appropriate for a small position and see if it germinates. The language of margin of safety and downside risk and multiples don't apply here. If you've read Quest for Value, you recognize that Amazon is a "Z". (And if you haven't read it you should.) And one thing that book convinced me of is don't short Zs. I wish I had read it earlier. One last point. When Bill Miller was buying AOL, I had the annual report on my desk. I was a customer of AOL, and a delighted customer. I was inches from buying the stock, and knew why, but didn't. I think I was looking for one point lower, then one more point lower. The signal to me should have been that all of a sudden the bottleneck cleared and I could log on again on the first try. But I didn't recognize the signal that was staring me in the face. That would have been what, a 20 bagger?