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Hi Fools,

I wrote the following in the last thread:

The light clicked on for me when I was valuing a small company that sold RFID technology during my MBA. The prof encouraged us to consider where the next round of financing was going to come from - being small, young, companies - the successive financing rounds becomes an issue.

This little RFID company was not going to get any debt financing (no collateral to speak of), doubtful they'd get any mezzanine financing, equity issue would be dilution hell (not good if you're the CEO/Founder/Head Option Abuser). But when you realized they had a tonne of ITM options with <1 yr to expiry, that would give them enough cash to continue living for another 2 years... Guess what happened? (Stealth equity financing).

A propos of not much, I flipped open Globeinvestor tonight to find the following story:

This happens to be the that same little RFID company I talked about in the last post. Seems that the chickens have come home to roost.

Unfortunately, a friend of mine did not have the rather negative viewpoint that I did on this company, and he purchased shares in the $2.50-$3.00 range. Last seen trading at $0.51, I don't think this announcement will do anything positive for the price. Haven't looked at this company for probably 2 years, but I guess they did get some sort of debenture financing, and that's what's likely to kill them off.

It's a lesson, I think, in 'Change Expectations'. We think change happens fast (and it often does, as any new parent can tell you). But what is faster than change, is often investor expectations of change (just ask any dot-bomb investors of the late 20th century). In the case of this little company, my friend was willing to overlook the insane valuation at the time (stock price might have been $2.50 - I was hard pressed to justify a value above zero), because it was RFID (Hot!), and Wal*Mart was requiring RFID for all suppliers by 2005, and such action would undoubtedly be copied by other retailers, and SamSYS made the best hardware, and..., and..., and.

I have a really interesting book that I picked up at a flea market for $2. It's called the Book of Predictions, and it was written by the same folks that did The Book of Lists and The People's Almanac, as well as the guy who wrote The 20th Century - History with the Boring Parts Left Out. In it, the authors asked numerous 'experts' in their fields, of what their 5, 10, and 25-yr predictions were for things that would happen in their fields of expertise. So the astronomer predicted moon colonies, manned mission to Mars, et cetera. The doctors predicted fascinating new drugs, head transplants, 200-yr lifespans, et cetera.

The book was published ~1973/74

What's striking is the scale of erroneous expectations across all fields. Seriously, we're lucky if the 5-yr predictions have come to pass, let alone the 25-yr predictions.

Perhaps that's why Buffett, Lynch, et al are proponents of not chasing the exciting and new, but sticking with the tried and true. Maybe those guys knew something after all.

We now return you to your regular IETC board, already in progress...


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