Is Dot Com Dead?
By William Cate
Published May 1999
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
A public company's share price relies on perception, not
fundamentals. Investors buy the sizzle and not the steak. It's the reason
stock promotion works. Perception can be manipulated.
Investors are lemmings. In the 16th Century, they invested in
tulips. In the 1970's, it was gold mines. Until recently, it's been the
Internet. The cliff the lemmings rush over is fundamentals. Most investors
don't believe the axiom that a business that isn't making money can't
survive.
Tulip Mania, Mining Mania or Dot Com Mania follows the same road to investor loss. There's an event that catches the media's interest. In the
case of Mining Mania, it was the collapse of the Bretton Woods Agreement in
1972. France forced the United States to float the gold price against the
dollar. This created a platoon of "gold bug" gurus. The profit wasn't in
telling the lemmings that the gold price was going up. The gurus made their
money telling investors to buy gold mining stocks. The gurus got their
stock free for promoting the mining company and sold into the buying they
created. Mining stock centers like Vancouver, Denver and Salt Lake City
boomed.
It doesn't benefit the U. S. economy, nor any Western Government,
to allow gold to appear safer than the U. S. Dollar. After 1980, Western
Governments moved to undermine gold [http://www.metropolecafe.com] as an alternative to paper currencies. The declining gold price ended Mining
Mania.
The gold bug gurus mining argument was illogical. They argued that
investors should not trust the U. S. Dollar because it was a worthless
paper (fiat) currency. However, investors should trust worthless paper
stock certificates because they represented the potential to produce gold.
Gold mining sank on three realities. The gold price never moved
high enough to offset the post World War II inflation. The Environmental
Movement imposed massive additional costs on mining, especially in the
United States. Most profitable gold deposits had been mined before 1972.
Without the prospect of profit, the potential of gold in the ground was
worthless. Mining Mania ended with the loss of billions of investor dollars.
The creation of the Internet is one of the major technological
events of the 20th Century. It's empowered the individual and contributed
to the fall of the Soviet Union. In the next Century, computer literacy
will determine social class and widen the gulf between between wealthy and
developing countries. Keep in mind that expanding world population means
increased demand for finite resources. The Net doesn't produce food,
shelter or clothing. But, media focus on the Net is justified.
The Net isn't a means of production. It's a means of distribution
of goods and services. You can sell books on the Net, without renting a
bookstore. I can sell my financial consulting services with this
newsletter, without paying for printing and postage. In theory, these
savings should translate into greater profits.
Large businesses on the Net are designed to be unprofitable. If the
principals in a startup Net business must earn US$100,000 to US$400,000 a
year, that money must come from investors. Everyone from the CEO to the
janitor must have large blocs of stock in a Net company. When that company
goes public, the employee stock usually destroys the share price. Who takes
the loss? Investors.
The investors expect a greater fool to absorb the insider selling
and take the share price higher. In a few instances this happens. In most
cases, the IPO buyers have proven to be the greater fool. The mistake has
been repeated so often that many investors are wary of Dot Com stocks.
The problem isn't the glut of Dot Com IPOs entering the Market. Dot
Com has become terminal because of permanent non-profitability and insider
selling. The evolution of the Net won't rescue these failing Dot Com
companies.
Few Dot Com technology companies can keep on the forefront of
technology for very long. They will have a brief period of excellent
revenues and then they will fade. Dot Com distributors, particularly niche
distributors, can survive and prosper. The secret is to make more money
than you spend.
Here are my five rules for making more money than you spend with a
Dot Com Distribution Company.
1. Keep your overhead down. This means modest salaries. It means
few perks. The company must have a strong controller.
2. If you must give away blocs of stock, require that they be
pooled and vaulted along with your insider stock.
3. Incorporate in a tax haven. Operate from a country that doesn't
tax foreign-source income. If you are a Canadian citizen, you operate tax
free. If you are an American and keep your salary below US$70,000, you
operate tax free.
4. Contract reliable overnight shipping services in the States,
Canada and Western Europe. Keep regional inventories adequate to meet
expected demand.
5. Target your buyers on the Net. In the San Francisco Bay Area, I
assume all the Dot Com companies advertising on the radio are doing it to
create demand for their IPOs. It can't be to sell their product.
I think Dot Com IPOs are dying. Dot Com technology companies will
find it harder to attract IPO investors. Well-run Dot Com distribution
companies will survive and prosper. However, Net investment interest is
going into a period of major decline. The Lemmings are looking for a new
cliff.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]