net.wars: The herd instinct
by Wendy M Grossman | posted on 03 September 2004
Ah, the dot-com boom. When men were men, traders were traders, and the sheep were all fleeced unless they got lucky and sold at exactly the right moment.
One of the relics of that mad, frenzied era, finally held its funeral services this week. IPC Funds, current owner of the World Wide Internet Fund (WWIFX), announced it would liquidate and distribute what was left of its investments in companies like iVillage, TheStreet.com, and Homestore. If you had invested $1,000 in 1999, you'd be getting back a couple of hundred dollars now. It could be worse. It could be like a house with negative equity or a dead horse, where you'd have to pay them to take it away.
Specialist Internet funds were the flavour of the year in 1999. Both IPC Funds' WWW Internet Fund (WWIFX) and Kinetics' The Internet Fund (WWWFX) were set up in 1997. Janus, taking advantage of the boom times, set up its Global Technology Fund (JAGTX) in 2000, more or less as the market was peaking. If you'd invested in it then, your overall return would be an 11.55 percent loss. If you'd bought into WWWFX, you'd have done better, losing an annualised 4.42 percent over the last five years. It's still not pretty. No one, obviously, invests to lose money. Might as well spend it instead.
The really dumb part is that between 1997 and 1999 many new tools to aid investors had come onto the Internet, giving the best access they'd ever had not only to good information about companies they already knew about but also to tools to help them find companies they didn't know about but that met reasonable, cautious criteria for picking an investment. Back then, Intuit had a hugely useful stockfinder tool on its Quicken site (now, sadly, turned into a restricted site only for registered users of the most recent versions of its software). Now, Yahoo! has a similar screener that lets you constrain searches to show you, say, only companies with a price/earnings ratio of less than 20, that pay a dividend, whose price/book value is less than five, whose earnings are up more than 50 percent in the last five years, and whose stock price is rising. Constrain the search tightly enough, and you're left with a handful of companies to go investigate by reading their SEC filings, company history, and other documents.
Had you run such searches in 1999 and confined them to software, hardware, and Internet technology, you would still have found several companies that would have met even tight versions of those criteria. They were, to be sure, young, small companies. But you would almost certainly have found a couple of very good prospects in fields that were no-brainers to grow into sectors of major importance. It was in fact possible even then to buy modestly priced technology stocks that have since tripled in market value. But you had to look, you had to remain unswayed by market and CNBC hype, and you had to be willing to take the risk of ignoring what everyone else was saying and doing.
A lot of people imagine that mutual fund managers have some kind of magic: they meet the CEOs, they visit the companies, they study the technology. But often, they don't do any of this to much effect. One of the questions Warren Buffett answered at this year's Berkshire Hathaway shareholders' meeting was about how he researches companies. Surprisingly, given that there can be hardly any business person on the globe who wouldn't take a meeting with Buffett, he said that he rarely goes to meet CEOs or other company personnel when he is considering buying a company or some of its stock. Instead, he reads the SEC filings, the company's annual reports, and anything else he can find, believing that the story is in the numbers, not in the personalities. It is, of course, a lot easier and glitzier to meet CEOs and have nice boardroom lunches; but reading annual reports is something anyone can do, especially now that they're so easily available. The Internet has truly democratised investment. It's just sad that so few people seem to want to take advantage of it. Yet you, as the Motley Fool folks keep saying, are the person who cares most about what happens to your money - and your own effort is free. Those two Internet mutual funds up there charged well over 2 percent in fees every year, significantly eating into any possible return.
Yet it's not just these few once-fashionable funds that show how risky relying on fund managers can be. In 1999, even mutual funds that described themselves as "blue-chip" funds were investing in the same companies-du-jour: AOL, Dell, eBay, Yahoo!. Obviously, three of those are fine companies, though Yahoo! went through a sort of near-death experience a few years later. But they were hugely expensive in terms of their earnings, leaving little margin of safety if - when, as it naturally turned out - the market tanked.
At this year's Buffettfest, Charlie Munger observed that you don't have to be right very many times as long as you're not wrong too often (and as long as when you are right you are not "niggardly" about it). It's a pity more Wall Street professionals don't think that way.
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net.wars: The herd instinct