Is Dot Com Dead?By William CatePublished May 1999[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]A public company's ...
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/]
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/]