Running Money, page 16
“There’s a flight to quality. Look at treasuries, that’s where everyone is parking their capital.” I tried to sound calming. It wasn’t working.
“You guys, and my money, are going to get killed.”
“We already have. It’s not real. It’s just the Street taking bids down.”
“But you’re going down.”
“Maybe, but we’ve already lost all of this year’s gains. We were up 80% through September, and now we’re flat for the year. But if you look at trading volumes, there is not much there. Someone is selling, there are no buyers—so the Street is just moving their bid lower and lower, trying to steal the shares. It’s not real selling. Risk just has a bad name for now.”
“Get me out.”
“I’d love to, but we do have a 30-day notice rule, and you’ll have to wait until the end of the month, so you can’t get out today anyway.”
“I’ll fax you a redemption request.”
“Why don’t you wait until the end of the month, because you’ll have to wait until the end of next month to get out. Maybe we’ll see a rally before then.”
“So, there is no way that I can get out today?”
“Nope. We put in the 30-day notice to protect all the limited partners from these types of situations—excessive costs of rapid-fire selling—to handle redemptions. We’re not a mutual fund. Plus, I think this Long Term Capital thing is almost over.”
“You better be right. I hate losing money.”
“Me too, but it’s part of the game.”
Luckily, it did blow over. Tiger got bailed out of the yen-carry. Soros licked his chops on the Russia default, and with the urging of the Feds, Wall Street stepped up and injected a billion plus into Long Term Capital to keep them from going belly-up and stinking up the market forever.
The risk of owning “risky” technology investments abated. Real buyers, like us, poured in. Those low bids started to lift ever so slowly.
God’s on Our Side
Screw it. We decided to stop raising money. It was taking up too much of our time without much result. Fred and I figured that we’d get investors once we proved that our model really worked.
We had been banging our heads trying to find investors to come into our fund. My hoops friend, Jay Hoag, who had already gone through this fund-raising stuff a few times, told me “the second best answer you can get from a prospect is No.” I now know what he means. Most people don’t say yes or no, they say Maybe and then stop returning your phone calls.
We did get a few investors each month to come in, but they were usually not anyone that we had marketed to, but instead someone who had heard about us. In fact, once we stopped actively raising money, more money trickled in. We called it second-hand or word-of-mouth marketing. It was the strangest damn thing.
The Tiger/Soros/Long Term Capital disasters in the fall of 1998 ripped the market to shreds. Our fund was in the riskiest of risky investments, at least on the surface, and the flight from risk devastated our performance. So much for raising money anyway. At the beginning of 1998, I had made the executive decision to submit our performance numbers to a few hedge fund services like MAR/Hedge and TASS, which track returns. I figured that someone might find us when our numbers got respectable. Now I was submitting big red negative numbers each month. We were now officially ugly.
The day after Long Term Capital blew up in 1988, we were actually down for a brief moment from where we started back in the fall of 1996. How fucking depressing. You fall below the high watermark and you start working for free. I guess it was fun while it lasted. A grand but failed experiment. I could always go back to being an analyst—maybe Morgan Stanley would hire me back. Back on the American Airlines JFK-to-SFO and back shuttle.
But then a funny thing happened. The homeless woman disappeared from the bench outside our office. It took me a few days to notice, but sure enough, she was gone—vanished in a poof.
And just as mysteriously, the dark cloud over our fund started to lift. Our numbers went up almost every day during November and again in December 1998. It happened that fast. We went from down for the year to up 100% in two short months. The value of our investments literally doubled from that day when James Duck wanted out at the bottom.
The biggest gainers were a few of our private investments that had gone public earlier in the year, like Real Networks and Inktomi. But just about every public company we owned went up in value. Our biggest laggard was Elantec, which went from $3 to $4½. Hey, we’ll take it.
It’s a goddamn yo-yo. We were up 50% for the year in the summer, and then underwater by October, and now, in December, somehow we had doubled our investors’ money for the year. I wouldn’t have believed it unless I had seen it with my own eyes every day.
And prospective investors started calling.
“What’s your cagger?” one guy asked.
“My what?”
“Your compound annual growth rate?”
“Oh, just a second, let me look it up.”
“You don’t know it?”
“Not really. Here it is. Uh, 45%.”
“Wow, really? Annualized?” he asked.
“That’s what the spreadsheet says.”
“That puts you in the top decile.”
“Great.”
“You better be ready. Money is going to pour in.”
“Yeah, right.”
“What about venture—the private stuff? What’s your IRR, your internal rate of return?”
“It’s 37%, but only two of our private investments are public. Hmm, let’s see, can this be right? Our IRR for Inktomi is 6,972%.” It was a silly quirk in the formula—an investment that goes up in value in less than a year has this huge multiplier effect on IRR.
“Like I said, be ready,” he warned me.
Another investor called and asked to go through the same numbers. Then he asked, “What percentage of your fund is short?”
“None,” I answered. This was one stat I didn’t have to look up. Shorting is selling a stock you don’t own (you actually borrow shares) at a certain price, hoping the price falls so that you can buy back the shares cheaper and then return them.
“You guys don’t short?” he asked almost incredulously.
“No. We never have.”
“But why not?” he asked.
We had been asked this question a million times.
“Well, there is an unlimited potential for loss.” This means that if the stock keeps going up, you have to buy it back at much higher prices. Imagine shorting Microsoft in 1986.
“Still…”
“And any gains are short-term gains taxed at twice the rate as long-term capital gains,” I added.
“OK, fair enough, but—”
“And you can only make 100%.”
“Excuse me?” he asked. It was a flippant answer but the only real one.
“Sure. We like to spend our time finding things that go up by 5 times or 10 times. If we spend our time finding shorts, the most you can make is 100% and only if the stock goes to zero.” Plus, I didn’t say, there was already a huge pack of hedgies, more like a pack of wolves, chasing down every potential short. We didn’t add much value in finding losers—that’s a “what others don’t know” game.
“So you’re not hedged?” he asked.
“We think our hedge is to avoid the losers,” I said. This was sassy but true. It was that quaint thing of finding great long-term investments. In down markets, they’re not going to do well, but in the long run, if we could find the waterfalls, the upside would be huge.
The floodgates did indeed open up. Our biggest catch was the Sloan Foundation, which had been considering investing since last October. Sloan is a billion-dollar foundation in New York started by Alfred P. Sloan, the guy credited with scaling General Motors in the ’20s and ’30s. Beyond the check they wrote, I thought it was poetic justice to manage Sloan’s money, since Alfred was famous for his centralized policy controls of the industrial giant. Here we were in Silicon Valley, investing away in companies whose products were decentralized in an almost chaotic intellectual property market. Silicon Valley is not your father’s General Motors.
We also got a chunk of money from a group that managed pension funds for clergy. I’m not kidding.
“Fred, that bag lady who ruined our numbers is never coming back.”
“How do you know?”
“Because we have God on our side now.”
“But you’re not—” Fred said.
“Even better,” I interrupted. “We’ve got all our angles covered. Nineteen ninety-nine should be a great year.”
And just like that, we now had $100 million in assets. We were finally in business.
Part V
The Next Barrier
Fleece Bank Internet Conference 1999
SAN FRANCISCO, CALIFORNIA—FEBRUARY 1999
Yup, I figured out that prowling around Silicon Valley was the right thing to do. The Japanese didn’t make much, if any, profit. Taiwan and Singapore and Malaysia were more than happy to manufacture stuff for very low margin. That meant Fred and I could concentrate on finding design companies around here. Little slivers of intellectual property would go a long way and perhaps become quite valuable. Plus, this whole Internet thing was taking off, which was going to require lots of equipment to build out. So it was back to conference mode to find some new names.
I was pulling up a few quotes between meetings when I heard a familiar voice behind me.
“You actually own Trouble-Click? And Sink-tomi? They might collect those receivables someday, I suppose.”
I turned and watched some poor soul in an ill-fitting suit scurry away into the crowd.
“Some people will never learn,” Nick Moore said, shaking his head.
“Having fun?” I asked.
“I always enjoy the Fleece Bank or is it the Robertson Fleece ’Em Conference? They have no quality control, so the companies they bring here are awful.”
“The numbers are good.”
“Your numbers would be good too if you stuffed your Asian distribution channel with more product than you could sell in fifty years.”
“OK, good point.”
“Management comes here and puts smiley faces on their sinking ships, and the stocks all pop on Monday and Tuesday, and I short ’em on Wednesday. It’s almost a sure thing. It’s Openwave today and Open-grave tomorrow.”
“Nick, what about the Efficient Market theory?” which suggests that all news gets priced into stocks instantly.
Nick let out a laugh so loud, heads turned across the room.
“Yeah, right, efficient market, good one. If it were efficient, we’d all be out of a job, you idiot.”
Another month, another conference, and another lesson in Cynics 101 from Nick. This time I was at the Robertson Stephens Fleet Bank Conference at the Palace Hotel just off Market Street. It was no better and no worse than the H&Q conference. Too many people chasing too few good companies.
“I remember the days when there were a dozen or so tech investors on the buy side. Now there must be thousands.”
“All rookies. See that guy over there?”
“The peach-fuzz-faced kid? He looks like a junior in high school.”
“Yeah, him. I have no idea who he is, but I’ll guarantee that he is some portfolio manager’s kid who used to upgrade the Windows software on their machines and now is in charge of finding hot technology companies.”
“C’mon.”
“Watch this.” Nick walked up to Peach Fuzz and checked out his badge.
“Whitaker Investments? Hey, I know your dad.”
“It’s my uncle,” Peach Fuzz corrected him.
“Oh, sorry. You guys still using Windows 95?”
“No, I did the upgrade to Windows 98.”
“Oh, cool. What do you like here?”
“Well, you gotta own Uniphase. Dense Wave Division and all. Plus interactive stuff is hot. Liberate came out of Oracle and has that Sybase guy and Take Two Interactive. I think that dude is married to a Victoria’s Secret model.”
“It’s Take Two’s CEO’s dad with the model. You think those stocks are going up?”
“I think each of them goes over $100, maybe $120.”
“Not gonna happen,” Nick said matter-of-factly.
“They’ll get close.”
“I guess you don’t know the price-name rule.”
“What do you mean?” Peach Fuzz looked nervous.
“I’ve been doing this for years. Never invest in a company with the target price for the stock in the name of the company.”
“What? That doesn’t make sense.”
“Sure it does, you’ll learn. Uni-phase, Liber-8, Take-2. Actually, I think it’s more like Liber-Eighth. It’s not so much that they are screaming at you what their stock is really worth. It’s not necessarily cause-and-effect, but the reason to stay away is because it’s bad enough losing money, you shouldn’t also risk ending up talking to yourself afterward too. You know, ‘Am I an idiot? It was right in the goddamned name!’”
Nick had everything figured out. I made a note to myself to avoid NetZero.
“I gotta go,” I told him.
“I’ll bet Uncle Witty owned Quarter-deck, Level 3, 4-Systems, and the worst of them all, 3-Con.”
“Take it easy,” I told Nick.
“Some people never learn.”
“Did you hear about Micro-tragedy? Could see that blowup from miles away?” It was Nick Moore again for my afternoon dose of cynicism.
Microstrategy was one of those scary software blowups. They sold “business intelligence” software, one of those vague names only a McKinsey consultant could love, so companies could track business trends. The stock was hot, and growth was through the roof, until someone figured out that they were signing three-year contracts and reporting the revenues right away, a Bozo no-no of accounting. The stock imploded, the CEO not only fired but forced to renege on some huge charitable donations he’d made with Microstrategy shares.
“What’s with these software companies?” I asked.
“Too lumpy…and too easy to fudge,” Nick pointed out.
“So…it’s the greatest intellectual property business. Software companies have rooms filled with programmers. Then they sell bits—little magnets pointed north or south—that cost nothing for a couple of hundred grand or a couple of mill,” I said.
“Yeah, but it’s the worst business for investors. Software companies never have any backlog. So smart customers just sit around and wait for the end of the quarter and insist on 90% off. A nervous CFO almost always coughs it up. The crooked CFOs just book revenue and figure out how to get cash later.”
I went to a Cisco presentation but got bored after a few minutes; nothing new there. I poked my head into a few rooms with private companies talking, but I didn’t hear anything interesting. Most of it scared me.
“What’s with all these newfangled companies? It seems like venture capitalists find anyone that can generate revenue and package them as the Second Coming,” I asked. I shouldn’t have set Nick off.
“Oh, you mean like Ariba-derci. Some Einstein decided there was a hot business-to-business sector. Duh. Isn’t that what businesses are supposed to do, sell to one another? There’s nothing new there except some high-flying stocks. B2B2F, as in fail. Or A2AD2D.”
I had to think about that last one for a while, but I finally got the ashes and dust.
“Aren’t there some safer ways to play B2B?” I asked.
“Like consultants?” Nick asked, with a menacing tone. You could almost hear the bile build up inside him.
“I sat through Scient or was it Viant?” I said.
“Consultants suck. Why bother. They have none of the upside and all of the downside.”
“What do you mean by that?”
“They’re sweatshops, there’s no leverage. They don’t have anything to sell. They just rent people. If they want to grow 30%, they have to hire 30% more people. You already know what they are going to make—not much. So, there’s no upside, and when the cycle turns, they’re going down just as fast as everyone else.
“Isn’t IBM’s new strategy to become consultants?”
“I Believe in Miracles? Yeah, good luck with that.”
“Nick, you’ve got to quit finding me. I’m trying to get some investing done. Learn something at this place.”
“Not at this conference you won’t,” Nick said.
“Why not?” I asked.
“Well, you can probably better learn what to avoid, like Jim Clark companies.”
“I’ve already heard your Regret-scape pitch,” I told Nick.
“It started with Silly-gone Graphics. Did you sit through the Healtheon, I mean Health-Be-Gone, presentation?” Nick asked.
“I’ve got a one-on-one with their CEO. Long or something like that, I think.”
“You mean a one-on-done. He won’t be there Long. They are just buying revenue to show Wall Street. They’ll no more solve the healthcare tech problem than Lose-ent will save regional Bells from extinction.”
“Do you like anything?”
“Flea-bay is interesting. But they shouldn’t even be here. They are a buyer of technology, they don’t create any.”
Another young, confused-looking guy came up and started asking Nick a question.
“Nick, the real leverage is in wireless. These guys own spectrum and can price it under the baby Bells. With no cost for spectrum, they just wipe up, right?”
“Like who?” Nick asked.
“Winstar, Teligent, guys like that. The satellite guys too.”
“Good luck. Un-in-Teligent and Win-Scar are just financial shams. They put in these $5,000 radios that stop working in a rain storm. No corporate IT guy will touch them. And don’t get me started on Iridiot—66 satellites crashing around. Get a life.”
