Mar

22

 I conducted a study on this [what would the return on buying one share of every internet related company have been for various beginning and end periods] during 1999 when we were trying to measure the opportunity costs for not participating in investing in internet stocks. I have also used some papers that appeared in the various CFA Journals about the steam engine where it was 13 years between development and commercialization and one on the value to 3 or 4th generation adopters or implementers of new technology. The Nifty 50, etc. The biotechs in my study earned the equivalent of t-note return but with obviously higher volatility for 7 years, then surpassed it. The upside was, however, if you invested after the bust or even waited until the first signs of profitability returns were between 45% and 20% per annum respectfully. My conclusions were successfully to buy Google on its first day of trading and are behind my thoughts how to play china, solar, and cloud computing now.

1) In the mania - long/short (go long profitable ventures and short the unprofitable ones) - but in a more paired fashion (you need the industry and sector and multiple hedges– mismatched books can get difficult (i.e. the MSFT v. cloud issue now). The market when it achieves good clarity will price things on par with "risk free" investments, however, the unprofitable will always collapse at a faster rate than the profitable even within the bubble space. The best thought on this was from John Griffin who suggested shorting those brought public by second tier underwriters. He's logic - if even Goldman, Morgan, Merrill won't IPO it how bad is it. He found 30 internet stocks brought public by Whale Securities.

2) During the bust - redouble positions on profitable names - and pile in on 3 and 4 generation situations. i.e. Google was not the first search engine. AMZN has surpassed its highs just like AMGN and BIIIB of the prior study. EBAY is on the move again. QCOM - the biggest mover of 1999 has moved past its old highs.

3) Develop comps (for Google, we assumed the internet was as important at the PC, so we took Google's EPS divided into MSFT's EPS but assumed a 3x growth rate - on par for ho the PC industry developed). In the case of a NFLX, GOOG, SNDK, etc. look for what existing industry can be cannibalized for valuation purposes. GOOG was about TV ad revenue, NFLX put blockbuster under, and SNDK and the digital camera ate EK. The two way pair test on this would be a company on the Altman Z-Score test like Blockbuster or EK with its opposite on the sales and earnings growth momentum screens.

Current thoughts along these lines - if the Chinese are already the largest player in the physical markets (oil, copper, etc) and they are the mercantilist they seem to be (i.e. BIDU v. GOOG) then won't their financial markets ultimately be the same? If so, they what companies - probably not the ones listed now - who built the interstate? but who has a store on every exist?

SOLAR and alt energies rest on subsidies but if the productivity gains are real there is a cross over but there will be a bust - with only the ones getting to legitimacy surviving.

Cloud computing– another fine area

4) Spin-Offs & cross holding- follow smart company monetization strategies (i.e the Barnes & Noble v. B&N.com effect). Today see LVS, MGM, WYNN, on their Macau holdings. PM v. MO. It is a trend that should be concerning to the country. The companies are showing there is no growth here, so you spin the domestic and load it with debt (aka MO) and price the other for growth. In solar, CY, etc.


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