Forum Archive Index - April 2000

[Phil Eriksen <phil@acepay.co.nz>]

> Oh bother Simon. You sound like one of those unfortunate analysts who
> have watched the Nasdaq climb 80% in 1998 and 100% in 1999, and
> completely missed the boat. Unlike Warren Buffet who did likewise and
> saw his shareholders portfolio lose 50% last year, he apologised for the
> poor performance. How brave to predict a burst bubble now. I dont think
> so Tim.


You will note that while Warren Buffett did apologise for his
performance, he didn't modify his investment style, principles or ideas
one little bit.  His job (with regards to the shares in listed companies
he owns) is, as he states "to moderately outperform the index".  He
failed badly in last years environment, and took the blame for this.  

By accepting full responsibility for the performance he is saying "I did
what I've always done, and it didn't work".  However, he has continued,
and presumably will continue, to invest in the same way he always has. 
What does this tell you?  

Someone with Buffett's level of wealth tends to learn from their
mistakes.  The fact he will continue investing the same way he always
has, despite last years "mistake" makes one wonder who is making the
mistake - Buffett & Co, or the "shares will go up 80% a year, forever.."
crowd.

With regards to the "bubble bursting" I think there are two issues
really.  There is the technology itself, and the valuations applied to
that technology.  Re the valuations, I don't know if the bubble is
bursting, or when it will burst, or what will happen.  What I do know,
however, is that the share prices of companies that lose, say, $30mil on
$20mil of sales *can not* appreciate at 80% per annum forever.  

Regarding the technology itself, I don't think the "bubble" will burst
at all.  Long term, I suspect there will be a time when it will be very
hard, nigh on impossible, for technology companies to raise capital. 
Sentiment can swing both ways - while today we are throwing money at
"bad" concepts, the day will come when investors will refuse to fund
"good" concepts.  This is the best thing that could possibly happen.

Technology, when used correctly, really can be used to reduce expenses,
grow sales, improve margins, and do all the marvellous things that
people say.  The financial benefits, however, are accruing to the
companies that use the technology rather than those that develop it. 
With the huge valuations put on tech companies, it has been more
sensible to price something at, say $100 and sell 1 million items at a
loss instead of price at $3,000 and sell 100,000 at a very tidy profit. 
Why? - because if sales, market share, sentiment and "future prospects"
are heading skywards investors have been prepared to buy tech shares,
regardless of the bottom line.

This has to change.  At some point, as stated above, it will be very
hard for tech companies to issue shares at the rate they currently can. 
When that happens tho, technology won't stop advancing, and we all won't
retreat back into caves.  Instead, profits, margins, low expenses,
managers who focus on "details" rather than "expansion-at-all-costs"
will be the order of the day.  

When technology shares, as I think they one day must, become "unpopular"
and impossible to float, I believe the real fun will really start.  At
this point, all of the scammers and con men who suddenly became techies
will find they have no place in the industry.  The key will be
developing great products on the smell of an oily rag, and having people
buy them because they actually want them, not because of a torrent of
advertising.  A big reason why software development and the internet was
seen as a "revolution" is that you don't need a big building and
limitless capital to get into it.  Theoretically, at least, 2 guys in a
shed can write a product that will kick the shit out of Windows.  

In recent times, however, those 2 guys merely needed to put out a press
release saying "we are half finished writing <insert application>" and
venture capitalists are knocking on their door.  Now, those two guys
probably could of written the software for $20,000, the only expenses
being pizza, rent and lots of Coke.  If investors give them $5,000,000
tho, how much do you think the software will cost to write? - $20,000,
or $5,000,000?  It doesn't take a rocket scientist to work that one
out.  

What the investors will want for their $5,000,000 is "first to market"
advantage, lots of hype, early sales and constant growth.  Because of
this, those two guys (now called takeovertheworld.com) will be forced to
hire 20 guys they didn't need to do a rush job writing bad software in
order to be "first to market".  The two guys will be busy briefing
investors, trying to manage 20 people, and spending the $5,000,000 on
new laptops, company cars etc etc.  Surely this is not a recipe for good
software?

The best outcome would of been to leave the 2 guys alone.  They could of
taken their time, perfected the product, and quietly released it.  If
the goal was selling software for profit, rather than selling shares for
profit, they would have to price it appropriately.  If the product was
useful and well designed, a few well placed ads would get the ball
rolling, and before too long, word of mouth sales would lead to growth -
*profitable* growth.

The day when all the money men disregard "tech" for the "next big thing"
is a day I look forward to seeing.  At this point, people will work in
the industry for the *right* reasons, products will be designed to
capture users rather than attention, prices will be set to achieve
profits rather than sales, and those two guys in the shed can be
developers rather than wall street pinups.  When that day arrives, we
will really see the potential of technology to improve efficiency, lower
costs, and improve lives.

Cheers,
Phil

----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
To remove yourself from this list, please us the form at
http://www.sharechat.co.nz/forum.html.