Issue #39 - 7/00

FOR WHAT IT’S WORTH

*“Don’t Blame Me”*		Issue 39
By: Ron Brounes		July 2000

Far be it for me to shy away from controversy. Hopefully, some of you remember my March 2000 newsletter (“Irrational Exuberance”) where I expressed my unease about the valuations of the equity markets and the investor mentality that existed back then. That piece was later reprinted in an April issue of Houston Business Journal. In it, I shared a few stories about the investment patterns of certain nameless, faceless acquaintances as justifications for my concerns. Somehow, they recognized themselves in print and their (over)reactions were quite negative. (I try to give someone a little publicity, and this is the thanks I get.) One of them complained, “Dude, you have no idea what you are talking about.” Another threatened me with litigation over my “libelous” comments (again proving that lawyers still have one track minds).

In that piece, I implied that something ultimately would happen to cause an adverse reaction in the markets and the short-term results could be devastating. Fast forwarding just a few weeks from the distribution of the newsletter (early April), my “prophesy” unfortunately came to fruition. Much of the news of the day had potentially negative implications for the markets. The Microsoft judgement was announced and that decision ultimately could lead to the breakup of the technology giant. Numerous sources reported that many once high-flying Internet companies were strapped for cash and may have difficulty lasting the year without a capital infusion. Tight labor and rising oil prices had investors once again thinking about inflation. All at once, panic ensued and the markets began to tumble. Investors who owned stock on margin were often forced to sell other positions merely to cover their debt. This domino effect caused prices to fall even further.

THE CARNAGE SETS IN

The volatility in the markets was dramatic; hundred point (or greater) movements in the major indices seemingly became daily occurrences as uncertainty prevailed. The tech heavy NASDAQ tumbled over 35% (from high to low) over the next few months. Virtually overnight, many pure Internet plays with no near-term prospects for profitability fell greater than 50%, bringing some fundamentally sound companies down with them. Even one of the bellwether Internet issues, Amazon.com, plummeted dramatically when an analyst questioned its business model and ability to actually make money in the future. The initial offerings of companies that had hoped to go public in order to raise much needed funds were put on the backburner, forcing them to turn to private investors. Venture capital firms could not seek out new deals to finance as they often had to pour additional funds into existing portfolio firms simply to protect their initial investments.

As one reader pointed out, professional investors were not left out of the debacle. Many are now putting their best “spin” on the situation as they explain their performances of the past quarter. Some blamed Greenspan’s “incoherent” policy of slowing down the economy. Others pointed fingers at inexperienced day traders for creating excessive volatility in the markets. Managers began touting their latest returns “relative” to their benchmark index rather than in “absolute” terms. “Oh sure we lost money this quarter, but relative to the index, we really did quite well.” While a few even blamed me for “jinxing” the market, I had to remind them that I was not hoping the correction would occur, but merely expressing my general concerns. In reality, my personal portfolio looked a lot better in late March. (Do as I say; not as I do.)

NOW WHAT???

The universe of stocks has been divided into two primary categories: techs and everything else. Much of the correction occurred in tech stocks, some of which traded at unjustifiable valuations merely because they had an “e” or “com” attached to their names. Some may recover; others may not. Many of those companies would have never been taken public in the first place were it not for the “dot.com” euphoria that swept the country. Yet, investors (professionals and non-professionals) continued to pour money into them and felt they were invulnerable to any future pullbacks. Some have learned their lessons the hard way, in their pocketbooks.

In reality, the Internet is undoubtedly changing our lives as we know it. Investors should not do an about face and shy away from any and all issues that rely on this technology. To the contrary, they should seek out those companies that will see their operations benefit from it. Many “old economy” companies with traditional business models are using Internet technology like never before. Unlike the “pure” Internet firms, some of which are not generating any profits, many of the well established companies are highly profitable and are expanding their operations by transacting business faster, cheaper, and more efficiently than ever before. Hopefully, investors have learned their lessons regarding margin and speculation and will now focus on fundamentally sound companies with justifiable earnings prospects for the not so distant future.

KNOWLEDGE IS GOOD

Today’s investors are actually smarter than in years past. They watch CNBC, read business periodicals, follow economic releases, and conduct their own research on the Internet. Instead of discussing baseball scores and batting averages around the office water coolers, they are now debating the merits of upcoming Fed policy. (That makes sense in Houston with the Astros 21 games out of first place.) However, a little knowledge can often be a dangerous thing, especially when emotion and money enter the equation. The “greed factor” and sense of invincibility caused many educated investors to make very illogical, often short-sighted decisions.

Even the most astute professionals do not have the answers for the uncertainty that will always exist in the markets. Has the correction run its course? Will the high techs return to favor? Will OPEC allow oil prices to stabilize? Is Greenspan finished raising interest rates? Who will win the Presidential election? What about Congress? Will the Astros lose 100 games? The key to investing is to have a long-term plan and purchase those securities which help meet goals and objectives. Most smart investors think long-term and rarely concern themselves with short-term fluctuations that drive the rest of us crazy. Certainly it is more fun to speculate on that “hot stock pick of the day,” and to heed the advice of a “brother’s friend’s cousin’s housekeeper’s husband,” who is supposedly making a fortune in the markets. But it may just be better to think long-term, even at the risk of being told, “Dude, you have no idea what you are talking about.”

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