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OPINION:
The New Economy That Never Was

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Contributed by Stanislav Kelman
osOpinion.com
March 23, 2001


Why would anyone ever trust a stock tip from an amateur day trader with a fake e-mail account? Yet, at this time last year, that sounded like a good idea.

In This Story:

Death of E-Commerce?

Whom Do You Trust

A Letter from Above

Trust Issues

Came, Conquered

Last March, the Nasdaq skyrocketed above 5,000 points to reach its highest valuation ever. Everybody appeared to be cashing in and people just couldn't stop talking about their burgeoning stock portfolios. The technology sector was on fire and IPOs were red hot.

To most people, it was inconceivable that the dot-com bubble was just about to burst.

But in the last year, the Nasdaq has sunk below 2,000, losing more than 60 percent of its value. A lot of the high-profile companies that appeared unstoppable not so long ago are now nothing but a fading memory. And the once obnoxiously vocal day traders are finally keeping their mouths shut.

What a difference a year makes.

Death of E-Commerce?

It was surely fun while it lasted. Over the last couple of years, I got a lot of great deals online, thanks to endless coupons and unprecedented discounts. A daily visit to TechBargains or DealNews was a truly rewarding experience, with promotions so plentiful, it was hard to restrain oneself from buying too much.

The dot-coms were trying to outdo each other, throwing money left and right. One of the most memorable blunders of the hype era was an unconditional US$100 off coupon from Value America, a now defunct outfit once financed by Paul Allen’s Vulcan Ventures. I still regret not finding out about that one on time.

Anyway, the list of bankrupt Internet retailers that were supposedly valued at hundreds of millions of dollars just a short while ago would probably exceed the entire space allowed for this editorial. In fact, whole e-commerce sectors are virtually getting wiped out. With companies like Pets.com falling off the map, those looking for doggie treats online might soon be out of luck.

Great domain names such as Hardware.com, Furniture.com, and Garden.com did not help their owners much. Neither did novel business models like Mercata.com's reverse auction paradigm. They are all gone and nobody but their former employees seems to miss them.

Whom Do You Trust

The so-called stock analysts must have been blind to maintain a buy rating on shares of eToys up until just a couple of months before the company went under. How can we rely on these "experts" any longer? And whom do we turn to for advice after we realize how badly they have discredited themselves?

I turned to Warren Buffett.

Yes, I'm talking about the legendary investor who was only a year ago accused of having lost his marbles as he was persistently refusing to put any money into the "emerging" technology companies.

He is back with a vengeance and the shares of his company -- Berkshire Hathaway -- are once again trading in mid-$60,000s range.

After all, the man who turned a struggling textile mill into a multi-billion dollar diversified holding company might be worth listening to.

A Letter from Above

So, what is it about his famous annual Chairman's Letter that's so extraordinary? Well, I've personally learned more from this no-nonsense report than from all the exuberant investment advice given out by the trendy paper millionaires that are still supposedly in charge of the economy.

Buffett’s writing style strikes me as witty and unpretentious. He often admits to being wrong in his predictions -- something that virtually no hot shot CEO-for-a-day would acknowledge even under a gun point. One of the greatest capitalists of our time humbly states to be merely "content" with his holdings and warns that he expects his businesses to have "ups and downs"

If even Buffett himself, a hugely successful investor with almost 60 years of experience, claims not to be "smart enough" to pick the few winners, why would anyone ever trust a stock tip from an amateur day trader with a fake e-mail account?

Yet, strangely enough, a year ago that didn't sound like such a bad idea.

Trust Issues

Most importantly, Buffett's Letter made me remember that the American Dream is not really about making a quick buck, but rather about integrity, trust and dedication needed to build a profitable business over the long haul. Incidentally, these are the very concepts that the dot-com people will probably never be able to comprehend.

One really insightful comment made in the Letter is that "value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get." This is a simple premise that has somehow eluded the new generation of investors.

Came, Conquered

Buffett said that many of the "bubble companies" were simply facilitating "wealth transfer on a massive scale" and managed to "move billions of dollars from the pockets of the public to their own purses."

In essence, they came, collected shareholder money, took most of it, gave some away, and left without a trace. And in the end, the New Economy simply turned out to be nothing but a high profile scam.

Perhaps, we'll have to be a little more cautious next time.

Talkback Forum


Author's background:
Stanislav Kelman is a market observer, not an analyst. He maintains a list of his past technology-related editorials on TechOpinion.org. He also invites you to visit LetItBe.org, a site where you can learn more about him than you might care to know. Stanislav would love to hear your reaction to his opinion columns, so feel free to drop him a line at osOpinion@LetItBe.org.

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