I believe that what is happening with Enron, WorldCom and their ilk, is the last gasp of the New Economy Scam. As ye sow, so shall ye reap. The New Economy Scam was built by an unholy cabal of promoters, investment banker/analysts, and willing accomplices ( investors ). That, and a lot of hype. Substance, in the form of assets, earnings, profits and cash flow were not important; in fact, were laughed at as being old fashioned. If you did not understand that a Stanford dropout, $5,000 and a clever idea were worth $1.5 billion in a properly promoted IPO, you were clearly washed up. It was not just a lack of interest that we witnessed, but a disdain for making money the old fashioned way of earning it. It was now hip to sell your smoke and mirrors to the suckers for a small fortune. In this Brave New Economy, nobody who was anybody would actually make anything, they would just dream and promote the Next New Thing. The unreal became real. Dreams became substance. We began to manufacture reality. The revolution became very easy to promote, because no one wanted to be considered an old fogey, incapable of changing with the times. What greater disgrace is there for a businessman or investor than to be viewed as too tired and blind to charge into this Brave New World of possibilities? And anyone who spoke against this new order was just jealous or out-of-date, and probably losing money. Ridicule would silence them. So, what happens when the greatest fool has invested his father's last dime, and this fake New Economy can no longer support itself? Having been seduced by their own lust for power, privilege and prestige, do we really believe that the Lords of the New Economy will easily admit to their failure, and honestly fade quietly into the night? The desperate attempts by the Enrons and WorldComs to keep their plates spinning by resorting to criminal conduct is dependently arisen. They are just doing more of the same type of thing that got them here. Many of these companies were not real, in the sense that their intention was to make money through sound operations. Instead, they were organized around financial and accounting manipulations. Every time a pyramid scheme is exposed, there is always that one last, desperate investor, who denies the reality of what has happened. As the confidence man is being escorted to jail, this sad individual will be at the back of the crowd, insisting that if the authorities would have let the con man operate for just a few more months, everyone would have profited. So as the New Economy Scam is exposed for the fraud it is, the confidence men get frantic. If they can hold their positions for just a few more months, the economy, or a new mania, or benevolent space aliens, or someone will save them, and everyone will profit. They need to manufacture reality just one more time. And if that means accounting fraud or financial manipulation, so be it. We, not you and I maybe, but WE, brought this on ourselves. We rewarded the pyramid builders. We celebrated the tech.com IPO's. We purchased the internet mutual funds. WorldCom capitalized $4 billion of repairs and maintenance to keep its power addiction going. An individual investor maxes out his last credit card to buy more of the latest hot IPO. At some unhappy level, it is all the same thing.
Elias, great post, except I don't think this "is the last gasp of the New Economy Scam." I think it has several breathes left. We have witnessed the obliteration of trillions in market valuations, and we are seeing some of the accounting shenanigans with Enron (nothing to do with the new economy), Tyco, Adelphia and Worldcom. But, this is far deeper and far wider than the general public suspects. There are many, many companies practicing what these companies have been caught for. I think there will be larger companies, bigger than Enron and Worldcom, that will result in a further decrease in the net worth of the average American. Perhaps other sectors will strengthen, and make up for some of the increased unemployment, but the shock waves are just beginning. I'm not sure how loan and investment portfolios will escape some deterioration due to these shocks. When the pendulum swings, it makes sure it swings almost as far the other way too! How can we justify the enormous asset bubble that collapsed and continues to, without it affecting the average citizen in some measurable way, which will ultimately be reflected in the economy. Has the pendulum swung far enough - I don't think so.I have friends who are still dollar-cost averaging down on Nortel. Their average cost was $55/share! I have friends who continue to day-trade, and are picking up penny stocks left, right and center. Oh, value investing! Yes, they've heard of it, but they made so much money in 1998 and 1999 buying tech stocks! Their broker tells them that now is the time to be buying. The recovery is just around the corner. While the damage has been severe for some, it's only a second degree burn for most - some blistering, a little pain and little or no scarring. Only when the majority are hit with the third degree and some are hit with the fourth, will we have had the last gasps of this era of excess. And therein lies the rub! Only a handful of the population will be prepared for the buying opportunity of the irrational pandemonium! Wealth will be transferred to the small minority that saw the greed for what it was. Cheers!
Elias,Hold on a second. I have to take issue with a few things. I agree that much of the excess of the New Economy Bubble was brought on by investing mania, driving values higher and higher as everyone involved had a stake in keeping the party going.That said, however, individual investors should NOT accept responsibility for those things that could not have been discovered by diligent analysis. Such as fraud by the Arthur Andersens of the world. We as investors have every right to believe that the system is fairly regulated. I as an investor should expect to take full responsibility for my inability to see the telecom slowdown, but I should not expect to take responsibility for lying on the part of executives and their cronies and accountants. If that is the case, why should I, or anyone else, believe Warren Buffett? Just because he has a longer track record? He has enough knowledge of accounting to hide things much better than the pikers at Enron and WorldCon. (Note: I have the utmost respect for Mr. Buffett -- I'm just making a point.)That doesn't mean we all won't pay for their excesses, though. P/E's will have to go much lower, to take into account the uncertainty in the 'E'. Good companies will pay for the excesses of the bad, but over time, these things will work themselves out. We as investors should take an active role. We should vote our proxies. We should demand independent board members. We should scrutinize executive pay plans. But we as individual investors need help. We need tougher laws, and tough sentences for those that committed fraud. The ill-gotten gains should NOT be able to be shielded by these corporate fat cats, using offshore accounts and bankruptcy laws. If you are convicted of securities or corporate fraud, the authorities should be able to take EVERYTHING YOU OWN. They should be able to yank your kids out of private school, sell your mansions and yachts, get refunds on your golf club memberships, and MAKE YOUR FAMILY HOMELESS. I mean that. I know it sounds harsh, but do the ex-employees of Enron (and shortly, WorldCon) deserve to take more risk than the CEO and CFO, who knew what they were doing and DID IT ANYWAY? Fraud is extremely tough to prove, so if it is proven in court, they should be able to wipe you out financially. It's a CRIME. It's not simple incompetence. It's a well-thought scheme to take other people's money on a grand scale. It should be severely punished, and not by some slap-on-the-wrist sentence in white collar prison, after which, the defrauder gets to live off the money he stole and was able to hide. That only encourages more people to take that risk.Oh, and as to your comment, "If you did not understand that a Stanford dropout, $5,000 and a clever idea were worth $1.5 billion in a properly promoted IPO, you were clearly washed up." Microsoft was founded by a Harvard dropout, wasn't it? Unless you're making a comment about Harvard vs. Stanford?Now, before you get your dander up, I'm just kidding. I totally agree that $1.5 billion was excessive for any of these startups, with the possible exception of Ebay.The general intent of your message, that we are collectively responsible for perpetuating this excess, is well-taken. However, there are a few things that could not have been seen by even the best investors. That's why diversification is so important.However, there are some things we can and must do in order to make the system better. We must eliminate, or at least bring to light, any and all conflicts of interest in the system. We must eliminate the incestuous, back-slapping, good-ol'-boy network in the boardrooms, in favor of truly independent shareholder advocates. I know that last part is easier said than done, but we have to do it if we want 'the system' fixed. We can't simply throw up our hands, close our eyes, and wish these bad things away. We have to insist that they be fixed.Dean
Dean -Excuse me for speaking for Elias; however, I believe his intention was that the individual investors fueled the fire, whether it was inflated share prices via B.S. stories or fraud. During the boom days, day traders were all the rage. Talking about the latest tech.com stock to double in a day was vogue. It was a fire that was started by investment banks, etc., but fueled by all of us. Although I didn't buy in, I loved the glitz and glammor of the whole thing. Secretaries becoming millionaires over night. 19 year olds on the covers of all the top business magazines. Hell, I remember co-CEO's being in the neighborhood of 19 and 15 (two brothers) for a company based on technology they created - - it was the New, New Thing... Utter ridiculousness that continued to grow until the money stopped coming in.Whether we were fooled by stories of prospects or numbers, we were fooled and allowed to be fooled.The Wolf
Dean, I agree with everything you say. We live in an imperfect world, and the individual investor does need help. But there still are things we can do to help ourselves. My post on Defensive Investing is what I try to do to protect myself from the problems you mentioned.
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