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TOM MORGAN'S MONEY TALK
This is more timely. Suggest you run
it next.....
Here is the real story of what went
on with the dot coms.
If you think the settlement with the brokerage houses gets to the core of the problem, I suggest you see only the tip of the iceberg. If you think the crash of these stocks was the fault of some stock analysts who misled investors, you see only a corner of the picture. A picture which few people write about.
The larger picture is this: The dot com industry needed funding. Desperately. Thousands of start-ups needed money. They needed it to develop their products, services, software ideas, you name it. The business world became oa sea of thousands of young entrepreneurs. Each one said ''If I only had the money, my brilliant idea would make billions! It can't go wrong.''
These companies needed billions of dollars of capital. The question was: Who would give them the money?
The answer was NOT the banks. They said ''Are you crazy? These are untried, unproven ideas. We fund the tried and proven.'' The answer was NOT the venture capitalists. They said ''We are accostomed to taking risk. But not that much risk. And not that much money.''
Various other sources avoided the dot coms. Mostly because the risks were too great.
Brokerage firms decided to give it a go. They said ''Sell stock in your ventures. Then give us the business of selling the stock. To sell the stock, we will bang the drums and do what we can to create some enthusiasm about your company and its ideas. So that we can sell more of your stock at higher prices.''
Part of whipping up that enthusiasm was getting their analysts to say some stocks were worth buying when they were not. Part of whipping up enthusiasm was to push their brokers to sell stocks that were not worth pushing. Unbeknown to the brokers, often. Part of the act was to hype these new issues as if they were gold nuggets. And to publicize the fact that some of them quadrupled in price within hours of being issued. (Those infamous hot IPOs.)
Why did the brokerage houses do this? Because they wanted all the profit they could make from selling the stock. Why did the dot coms let brokerage houses do this? Because they needed the money to finance their ideas. Why did investors go for it? They were greedy.
A good investor will often invest some ''mad money'' in something risky. Something which could make tons of money or crash. But the wise investor will limit those ''mad money'' investments to 2 percent or 4 percent of his total assets. Over the years he will see a lot of his ''mad money'' investments evaporate. And once in a while he will see one of them go through the roof. Because he limits his investment in these, they never drag his net worth into the mud. They never ruin his retirement.
Unfortunately, America had a lot of investors who sunk 30 percent, 50 percent, 100 percent of their money in the risky dot coms. Advisors cautioned them that these companies had never made any money. ''Yeah but look how this mutual fund (which owned a bunch of dot coms) has shot up,.'' they insisted. ''This is a great investment. You don't know what you're talking about. You're old fashioned. This is the wave of the future.''
I am quoting from real clients.
In the early part of the 20th century, investors lost millions they sunk into automobile companies. Every company looked promising. Every one needed capital. The auto industry was growing like topsy. Only a few made it, of course. Hundreds of auto companies failed, having experimented with the capital and having lost. Lots of investors lost their money.
We have just witnessed a repeat of that process. With more players. With the story playing out more quickly. It is the same story. We will see it again. When next an industry springs up and shows tremendous promise, if only somebody would come up with the risk capital.
There always has to be somebody willing to risk the capital. In the latest chapter of the story, the risk was camoflaged by the guys who sold the stock. And often, when the risk was shown to them, the investors ignored it.
From Tom...as in Morgan.
If you think the settlement with the brokerage houses gets to the core of the problem, I suggest you see only the tip of the iceberg. If you think the crash of these stocks was the fault of some stock analysts who misled investors, you see only a corner of the picture. A picture which few people write about.
The larger picture is this: The dot com industry needed funding. Desperately. Thousands of start-ups needed money. They needed it to develop their products, services, software ideas, you name it. The business world became oa sea of thousands of young entrepreneurs. Each one said ''If I only had the money, my brilliant idea would make billions! It can't go wrong.''
These companies needed billions of dollars of capital. The question was: Who would give them the money?
The answer was NOT the banks. They said ''Are you crazy? These are untried, unproven ideas. We fund the tried and proven.'' The answer was NOT the venture capitalists. They said ''We are accostomed to taking risk. But not that much risk. And not that much money.''
Various other sources avoided the dot coms. Mostly because the risks were too great.
Brokerage firms decided to give it a go. They said ''Sell stock in your ventures. Then give us the business of selling the stock. To sell the stock, we will bang the drums and do what we can to create some enthusiasm about your company and its ideas. So that we can sell more of your stock at higher prices.''
Part of whipping up that enthusiasm was getting their analysts to say some stocks were worth buying when they were not. Part of whipping up enthusiasm was to push their brokers to sell stocks that were not worth pushing. Unbeknown to the brokers, often. Part of the act was to hype these new issues as if they were gold nuggets. And to publicize the fact that some of them quadrupled in price within hours of being issued. (Those infamous hot IPOs.)
Why did the brokerage houses do this? Because they wanted all the profit they could make from selling the stock. Why did the dot coms let brokerage houses do this? Because they needed the money to finance their ideas. Why did investors go for it? They were greedy.
A good investor will often invest some ''mad money'' in something risky. Something which could make tons of money or crash. But the wise investor will limit those ''mad money'' investments to 2 percent or 4 percent of his total assets. Over the years he will see a lot of his ''mad money'' investments evaporate. And once in a while he will see one of them go through the roof. Because he limits his investment in these, they never drag his net worth into the mud. They never ruin his retirement.
Unfortunately, America had a lot of investors who sunk 30 percent, 50 percent, 100 percent of their money in the risky dot coms. Advisors cautioned them that these companies had never made any money. ''Yeah but look how this mutual fund (which owned a bunch of dot coms) has shot up,.'' they insisted. ''This is a great investment. You don't know what you're talking about. You're old fashioned. This is the wave of the future.''
I am quoting from real clients.
In the early part of the 20th century, investors lost millions they sunk into automobile companies. Every company looked promising. Every one needed capital. The auto industry was growing like topsy. Only a few made it, of course. Hundreds of auto companies failed, having experimented with the capital and having lost. Lots of investors lost their money.
We have just witnessed a repeat of that process. With more players. With the story playing out more quickly. It is the same story. We will see it again. When next an industry springs up and shows tremendous promise, if only somebody would come up with the risk capital.
There always has to be somebody willing to risk the capital. In the latest chapter of the story, the risk was camoflaged by the guys who sold the stock. And often, when the risk was shown to them, the investors ignored it.
From Tom...as in Morgan.
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