FOOL ON THE HILL: An Investment Opinion
Working in an industry you invest in has advantages and disadvantages. The advantages are obvious, the disadvantages can be grave. Don't let the din of enthusiasm drown out the bear arguments.
Last Friday, Orbcomm filed for voluntary bankruptcy protection. Unable to make the payments on its more than $200 million in debt, the company followed Iridium and ICO Global into bankruptcy. Cellular phone pioneer Craig McCaw rescued ICO and folded it into Teledesic, his start-up broadband satellite venture. Iridium never found a white knight and, as of August, Motorola (NYSE: MOT), Iridium's lead investor, planned to begin destroying the satellites this month.
It's hard to imagine nearly $5 billion of communications hardware and software floating unused 484 miles above Earth, awaiting destruction, when three years ago I sat in a packed room at a satellite trade show in Honolulu listening to crowds cheer Iridium's management and prospects.
We all wanted Iridium to succeed because most of us were deeply involved in the satellite business. An Iridium success meant liquidity for the industry: research dollars for companies such as Raytheon (NYSE: RTN.A), Lockheed Martin (NYSE: LMT), and Orbital Sciences -- all the companies I covered. (I never owned shares in any satellite company.)
I did have serious doubts about Iridium. I might even have been a skeptic. But I never predicted utter failure, not once, and I never developed my doubts into a clear bear argument. That means I sat on the fence while investors poured billions into a doomed project. As such, I consider myself one of many who went down with the Iridium ship, never believing it would really sink until it became clear the phones weren't selling.
Looking back, I couldn't see the whole picture because I was surrounded by experienced engineers, business leaders, and brokerage companies banking on Iridium's success; and I never pushed hard enough to escape the gravity of their reasoning. The din of their experience and enthusiasm drowned out reasonable objections -- which weren't definitive, by the way, but certainly needed a louder voice.
My takeaway is that working in a given industry has advantages and disadvantages when it comes to investing. The advantages are obvious, the disadvantages can be grave.
Charlie Munger, chairman and chief executive of Wesco Financial (AMEX: WSC), would call this incentive-caused bias. Munger says this bias is one of 15 or 20 psychological pitfalls people must understand and counter if they want to think clearly.
I understood the danger of bias, but didn't have a disciplined way to counter its effect. It's like the difference between two homeowners. One knows he needs an escape route in case of fire, the other actually has one. When the flames hit the ceiling, these two guys are sitting in different chairs, even though both had the same intentions.
I didn't get the full picture because I spent too much time surrounded by people with the same bias. Even though we were rational about things within our own circle, we didn't reach outside it often enough. It was like holding hands with 1,000 people as you all get pushed over a cliff, never thinking you're going to fall because you're holding hands with some very smart folks. Despite contact with industry bears, it wasn't enough to absorb the roar of enthusiasm, at least not for me.
I should have spent, say, 40% of my time learning about the cellular telephone industry, since the rapid buildout of wireless killed Iridium, and it was the clearest threat to satellite telephony services in the mid-1990s. I should have spent 40% of my time reading about Iridium, Globalstar Telecommunications (Nasdaq: GSTRF), and other satellite services, and the remaining 20% understanding the business challenge of launching a fabulously expensive technology into an undefined consumer space. How could I have missed it?
Meanwhile, Orbcomm is in Chapter 11. In January 1998 and 1999, investors bid up shares of Orbital Sciences to $50 per share based on high hopes for Orbcomm. Orbital Sciences closed yesterday at $8 5/8.
I gave Orbcomm much higher chances of success than Iridium. For one thing, it was expected to cost about $250 million, compared to roughly $5 billion. It ended up costing closer to $400 million, according to Paul Nisbet, a research analyst at JSA Research Inc.
Also, Orbcomm didn't have to compete against an entrenched rival industry. Cellular phone providers aren't interested in tracking cargo containers, communicating with scientific beacons, and monitoring pipelines. Orbcomm also had -- and still does -- a three-year lead on satellite rivals racing to offer the same services.
As late as 1999, Orbcomm officials expected to have 150,000 installed units by the end of this year. They didn't even come close. Currently the company has about 30,000 according to Nisbet, who estimates Orbcomm needs about 150,000 subscribers just to reach cash-flow breakeven. Over the last few months the company fired half its staff to get its cash burn rate down from $12 million per month to $4 million a month, Nisbet said.
What happened? According to Nisbet, the company had repeated technology problems, and Orbital Sciences -- rocked by accounting problems and a restatement of earnings -- hasn't been able to fund Orbcomm sufficiently.
Interestingly, Nisbet is bullish on Orbcomm's business prospects if it can get its financing settled. The company is focusing on its top 30 customers, which include giants such as Shell Oil, and Nisbet thinks the company can reach cash flow breakeven by focusing on these accounts. Of course, who knows what will really come out of the reorganization, or if Orbcomm will ever make money.
For me, I learned my lesson cheering for companies in capital-intensive, emerging industries. I'll let the pioneers take the arrows, and I won't step on the bandwagon until I've got a structure in place for dealing with any bias.
Have a great day.