Glenn, pass this along to Billy, because this is what his Hero Alberto thinks.
>1/22/01 4:01 PM ET
In a time when only true believers will go near Net stocks, Alberto Vilar is an unashamed business-to-business evangelist.
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Last year TheStreet.com Internet Index fell more than 70%. Today, aggressive investors are left with a conundrum: There might be once-in-a-blue-moon opportunities in the Net sector, but many of these fallen angels still have plenty of room to fall.
Vilar has run institutional emerging tech portfolios and private accounts for more than 20 years. He says the B2B industry, companies that help businesses transact with other businesses on the Web, is where Net investors will make money over the long term.
Given his risky style -- the Amerindo Technology fund gained 249% in 1999 and lost more than half its value last year -- his funds are probably best viewed as stock holdings. Vilar urges investors to pass on his funds if they aren't willing to hold on for at least three years -- though five or 10 years might be a better benchmark for the average investor.
No matter how you feel about his brash style, you should listen to what he has to say given his experience. He likes the usual B2B suspects like Ariba (ARBA:Nasdaq - news), but he also likes eBay (EBAY:Nasdaq - news). He's not a fan of Jeff Bezos' Wall Street-unfriendly moves at Amazon.com (AMZN:Nasdaq - news), and he doesn't see much reason to bother owning classic tech bellwethers tied to the PC like Microsoft (MSFT:Nasdaq - news) or Dell (DELL:Nasdaq - news). And he addresses why all those unhappy campers who lost money on his fund last year should hang on.
Alberto Vilar
Fund
Amerindo Technology
Managing Fund Since
Oct. 28, 1996 (inception)*
Asset Size
$526 million
YTD Return/Rank in Category (1=Good, 100=Bad)
6%/80%
3-Year Annualized Return/Rank in Category
35.2%/53%
Load/Annual Expense Ratio
none / 2.25%
Ariba (ARBA:Nasdaq - news) eBay (EBAY:Nasdaq - news) Homestore.com (HOMS:Nasdaq - news)
Source: Morningstar and Amerindo *Co-manages fund with Gary Tanaka
1. Thanks to a slowing economy and dips in companies' spending on technology, a lot of fund managers see continuing weakness in the tech sector at least over the first half of this year. What do you see for the tech sector in 2001?
Vilar: First of all, the basic theme we have been espousing here for a couple years is 100% intact, and that is you're seeing the biggest deployment of technology in 40 years, which is the Internet play. And to us, notwithstanding the holdings that we have like eBay, the Internet is about the deployment of electronic commerce amongst businesses.
That really is a three-pronged driver between B2B, infrastructure software for B2B and the new high-transmission mechanisms -- and we're pretty sure they're going to be in the optical sphere to carry that data.
So that hasn't changed at all. Then I think if we go back and see what's happening now, I'll tell you right now that 101% of all market observers and journalists are going to miss this point. You have huge differences in technology right now, and what you're seeing right now with some of the weakness in the Dells of the world, the Intels (INTC:Nasdaq - news), and possibly even a Cisco (CSCO:Nasdaq - news) is that they are in yesterday's technology.
We know that technology's going to decelerate, there's no question about it.
If you just take a back-of-the-envelope guess, in the next three years, probably half of our access to the Internet will be through some remote item. And that whole wireless remote movement is not a desktop PC.
So what you're going to see is decelerating trends within yesterday's technology. Then you're going to see accelerating trends within tomorrow's technology. The established companies, which dominated the client-server technology that dates 1984, are going to be decelerating. The new kids on the block, the Aribas and the i2 Technologies (ITWO:Nasdaq - news) and the Siebels (SBEL:Nasdaq - news) and the Sycamores (SCMR:Nasdaq - news), they are going to be accelerating because they are in the new technology. This is the biggest single theme in the next 10 years.
2. So you see the folks you just named as the new tech bellwethers going forward?
Vilar: Absolutely, and that's going to be where the action is and that's why these stocks are going to rise again, because people are going to say we are in a new paradigm in technology.
Even if you argued that the economy was stronger last year -- which it clearly was -- and argued that capital spending is going to slow down for the traditional portion of technology -- the Hewletts (HWP:NYSE - news) and the IBMs (IBM:NYSE - news), and that's our view -- we think companies will not slow down their spending for the buildout of the e-commerce network that they're all going to operate.
In five, six, seven years, half of all business between businesses will be done electronically.
The negating factor in Internet deployment really is the transmission side. But I submit to you that companies this year are going to put far more than they did last year into B2B, because they really went through the first phase last year. They went through simple things like e-procurement and customer relation management. Now they're going to go into much deeper parts of that whole mechanism to bring in their whole supply chain into their net. So I think that part of technology is going to see an increase in spending and not a decrease.
But I can only say this so many times. There's going to be a lot of confusion about spending in tech. Most people are going to take the aggregate numbers and say, "You see?" Last year the growth rate was X, and this year it's X-something, that's true. But last year the spending on e-commerce was very small; that's going to be a larger number now. And what they spent on PCs and such last year is clearly going to go down because that really is yesterday's technology.
3. So you see a long dry season for the Microsofts and the folks that are more tied to the PC?
Vilar: Yeah, but I wouldn't call it a dry season. Those older guys have to reinvent themselves. And there are only a couple of guys out there that have the ability to buy their way into the new play.
Cisco has made 20-25 acquisitions in the past two years. Microsoft has tried, not all that successfully. Those big guys from yesterday have to, it's almost impossible for them to develop this internally, so what they have to do is go out and try to acquire this technology, and many of them won't.
So on a five-year basis, a significant number of these companies are going to be left behind because the technology's changed and they can't change that quickly with it.
4. When we look at the more consumer-oriented Net plays, your recent portfolio included eBay. What do you see in that space, with companies like Amazon.com, Yahoo! (YHOO:Nasdaq - news) and eBay?
Vilar: If you were to look at the Internet in five years, maybe 10%-15% of the business investment opportunity would be in the [business-to-consumer], [consumer-to-consumer]. And I think clearly there are a couple of companies in there that I think are going to create legitimate franchises that can be profitable and that can grow.
We own eBay, and have since day one. eBay continues to astound the pessimist in that they continue to roll out new services. They're doing extremely well. And I think in the beginning, some people said, "Oh, this is cute to get rid of the junk in my garage." But they really are doing a lot more things right now, and I think they really dominate that technology, particularly since they developed it and deployed it.
We have another company called Homestore.com (HOMS:Nasdaq - news). If you just look at the size of the real estate market, which you could break down into the home ownership, rentals and commercial, it's a huge market. And a certain amount of that market lends itself to digitization over the Internet. And they have done all the right things from day one. So I think that market is big enough that a company could get first move advantage.
Real estate is one of the biggest industries in the country, and real estate is an awful lot of walking with your feet and wasting time. And I think that's a market that lends itself to Internet technology.
Everybody now has turned on Yahoo!, but here's an interesting case, where two companies really own the portal access market -- AOL (AOL:NYSE - news) and Yahoo!. Yahoo! has done a lot of good things. Sure, they're obviously changing the internal dynamics of the business model. But we're only 300 million people or something on the Net and on our way to a billion and change, so to think that it's all over for them is crazy.
So here's the pendulum case of Wall Street, where they took it up and they took it down, what the company has is really very management-deep. They have an awful lot of clients needing eyeballs, they have technology, they're going to acquire a lot of little people, and I think if you have a two-year view, that stock will be extremely rewarding.
How about Amazon, which has, over the past 12 months, been a favorite whipping boy as well?
Vilar: Unfortunately, it was a favorite whipping boy of mine but for different reasons. I just felt at the top, that Jeff Bezos was out of touch with reality and he had a view on how to run his company, and I thought the view was not Wall Street-friendly. Wall Street will put up with a number of things, including losses if you're showing progress, and he basically said, I'm going to do it my way, I'm going to increase my losses because I have an opportunity to gain market share and do this.
I had several discussions with him and I said don't do this, Wall Street's going to shoot you. And of course, when you get to be worth $20 billion you don't listen to many people, so the answer is, Wall Street shot him. I mean, I was one of the first people in line that really began to reduce enthusiasm for the stock.
If you take a three- to five-year view, and you could say are we going to have an electronic Sears or Wal-Mart, the answer is yes. Is he likely to be that candidate? Yes. Do you feel a compelling need to have that kind of retail representation? That's a different thing.
5. Everyone's worried that tech companies are going to keep missing analysts' expectations this year. Cisco CEO John Chambers' recent comments were not too positive: He said it was as if someone had flipped a switch in December and cut off a lot of corporate tech spending. Do you think we'll be pleasantly surprised, or are we rightfully pessimistic?
Vilar: Well, I think there are two things. I think you're going to have a very bifurcated outcome of earnings, which ties back to what I said a moment ago. If you're in the right space, you're going to be hitting the ball out of the park. If you're not in the right space, there are going to be a lot of misses.
If you really want to make big money on these stocks, you've got to be a big picture guy. And I never met anybody who got very rich on these stocks by trying to guess the trend of business on a quarterly basis.
If you think that your stock could have a big-time miss, there's no question they're going to cut it in half. But if it's a question of a macro guess -- here's a case where you have to have a sense of humor to be in our business. All last year, 100% of our economists said, we pray that you have a slowdown, because we're running up against capacity, Greenspan is antagonized, the Fed has shifted to inflation watch, blah blah blah.
So, lo and behold, either luck or the Good Lord gave us a slowdown, and about a third of the people said, aha! Slowdown equals recession therefore I don't want a big multiple, I want a boring little utility and a food company. You can't have it both ways.
Most people whose views I would respect held the view last year that a slowdown was healthy. We've had three or four slowdowns in the '90s, and, to Mr. Greenspan's credit, he was quite proactive about those slowdowns. Rates came down, I mean fairly sharp, and the economy went on without having a recession.
I think right now, the recession forecast is in the minority. My guess is it's more like 80/20 against the recession and that would be our view.
Now, what does it mean? From a macro point of view, the wind has turned around and is at your back. Very quickly, I think you're going to get interest-rate accommodation. All you have to do is read the paper to know that Mr. Bush has now instructed his team to get that massive tax cut off before the new Congress early in the year, as opposed to putting it off. Well, that's a major psychological assist to the market. So I think the negative news on the economy has pretty much happened.
6. One thing every tech investor knows is that, in hindsight, it seems like we miss everything. We overestimate the impact that some products will have and that some ideas will have in the marketplace and we underestimate others. If you had to point to one trend or one product or one company that is, you think, the most underestimated, and the one that may be overestimated, what would you point to? These are the things we might look back at 10 years from now and kick ourselves.
Vilar: Well, that's a good question, but I would just make it broader than that. I'm not trying to sound cute, but I would say 95% of all investors would not know what the hell the Internet was about.
Remember, the first couple of years of the Internet, it was all C2C or B2C. It was all AOL, Yahoo!, eBay. Then right down the middle came the B2B guys and the infrastructure guys and the beginnings of companies in the optical network.
Then all of a sudden the market corrected, and the market typically corrected more than it should have. But those are the companies that are going to have the misses, and if you are a tech investor, a portfolio manager and you don't have a major exposure to this sector in the next couple of years, you're going to underperform.
So when you look at companies that we know and like that are down 60%, 70%, 80%, and their business is really taking off like -- the Akamais (AKAM:Nasdaq - news) -- those are the companies that people should be looking at.
The single most important thing to success in this business is understanding which technologies are going to roar for a couple of years.
7. A key component to your investing strategy that shareholders should know is your focused approach to stocks. I looked at the B2B fund and I think it had about a dozen holdings in it, which is much more concentrated than a lot of stock funds out there. Along with that sort of swinging-for-the-fences approach comes an awful lot of volatility. I believe the Amerindo Tech Fund was down more than 60% last year, after having a huge gain in '99. What's your thinking there with this deep focus, the big bets on a relatively small basket of stocks?
Vilar: This has been a cornerstone of our investment philosophy from day one, which is to have a concentrated basket which we call 20-plus or -minus a few.
Second, we have what we call let your winners run. So, let's just say you gave me $100 and I divided it into 20-23 stocks. Well, in 12, 18, 24 months, you're going to have three or four of those stocks go up two-three-four times, and the question is, are you going to sell those stocks, or let your winners run? We do.
8. There are probably some folks that bought in to your funds after 1999 when they saw a huge gain, who felt the big loss in 2000. Now they're reading this, trying to figure out if they should hang on, or what to make of these big losses. What's your response?
Vilar: My response is that they should really stay here. We launched the fund in '96, when the market really went down. Our fund went down 20%, then it went up 400%. So it's not that we are volatile, it's that the people who own our shares are volatile; but that's also an opportunity. If you want to make big money in this sector, you have to sustain that volatility. Trust me, they will go up a lot faster than they went down and they will go up a lot more.
The most you can go down is 40%, 50%, 60%, 70% but you can go up 500% on the upside. Sure, some people obviously came in after the big run-up in 1999, and they are not happy campers. But I think if they believe in what we're doing they will be extremely well-rewarded.
9. If you had to pick three stocks to buy and hold for five years, what three would you pick and why?
Vilar: This answer doesn't mean to suggest there are only three stocks, because I could give you another three. But just to be consistent, I would buy Ariba, I would buy eBay and I would buy Sycamore Networks.
First of all, I think the biggest single area will be B2B, it will be software for B2B. And I think Ariba is a major factor; it's one of three or four companies that really is pioneering the area, showing the right product development innovations. I am very confident they will be a major factor, a major survivor of a real growth industry.
Jumping around to Sycamore, the gating factor is really transmission. I think you're going to see enormous breakthroughs in transmission speeds through optical networks and optical switches. We're in the process of building an all-optical network that is dramatically faster than electrical or electronic networks, and Sycamore is a real leader in that area.
And if I gave a B2C company or a C2C, depending on how you describe it, that's eBay. But I could have very easily given you another transmission company. I mean, I could have given you a Corvis (CORV:Nasdaq - news), I could have given you another B2B. But these are three companies that if you said to me, "Put your money in a vault, walk away, come back in a couple years," I'd think you have an excellent chance of seeing a huge gain in these three stocks.
10. Given the very focused approach in your funds, they would seem to be really only for aggressive, long-term investors and not make up a big chunk of their portfolio. Do you agree with that? How much of somebody's portfolio do you think should go into this kind of high-beta style?
Vilar: Well, you're asking a question in a loaded way, so I'm going to give you my answer. And my answer is really this: You tell me whether it's aggressive or conservative to sit there where the technology is going to the graveyard.
And you would say oh, but my father's owned this, my grandfather owned this, it's been around for five or 10 years. Right. But it's not going anyplace. So the names that we now consider to be conservative, religious stocks, a lot of those stocks ain't going to be around for that long, and they're certainly not going to be growth stocks.
I mean a classic case is when I went to Wall Street -- I happened to be Catholic, so I can say this -- you genuflected and blessed yourself when you heard IBM. Their stock was going to own the world. And you spent about 15 years after that, in the '80s and '90s, losing 60% of your money on the most religious of all electronic growth stocks.
So you're really into a question of semantics: Is it conservative to sit here with a stock that is in client server technology that may or may not make the leap to Internet technology?
Second, here's another way I look at it. You can argue until the cows come home what percent of your portfolio or Mr. Smith's portfolio should be in growth. I think equities mean growth. If you want income, go buy a bond. If you want cash income, go put it in the bank. So I think all equity portfolios should have a growth bias.
Then I think you say, here's a number for you. We guess that e-commerce is something like 2%-3% of the economy today. We're saying it's going to 20% in five to seven years. We're saying that B2B is going to match Cisco's model. Cisco does 81% of its business electronically today. So what I'm saying is in five years or so, maybe half of the business in this country is done electronically. So now you're back there with your grandfather in the horse and buggy and you're saying, oh those wild, roaring machines that pollute scare the hell out of me, meaning cars.
I'm simply saying, if you want to project your holdings in the next five years, and you're not in this space, you're going to be left behind. So I think you have several dynamics here; your definition of conservatism in technology and mine are two different things. |
