FOOL ON THE HILL
The Worst of "Investing 2000"

It's been a tough year for many investors, particularly those who have piled into what were once the "hot" sectors. Still, even in a year that was less-than-friendly to individual investors, some companies and people have provided fodder for special mention through their actions: MicroStrategy, Lernout & Hauspie, and Mark Jakob, for example.

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By Bill Mann (TMF Otter)
December 22, 2000

Yep, 2000 has been a doozy. Still, in how many other years could any single U.S. market -- the Nasdaq in this case -- lose 54% of its value and yet only give up 18 months worth of gains? It's important to realize just how short a span of time this is. Many of those who have been investing for two years or less have seen their portfolios decimated. This hurts -- it really, really does. But who invests for only two years? Not you, I hope.

You will see times of euphoria again in the future, just as you will see more times when the market drops precipitously. We may never see years like 1999 or 2000 again, but elements of the rise in the markets' rise in the former and collapse in the latter are threaded throughout history, and will come again many times over in the course of your investing career.

Where 1999 gave many the false sense that bigger risk automatically equaled bigger return, 2000 taught the opposite: "In investing you can lose a lot of money." Both of these concepts -- particularly the former -- are more related to gambling than they should be to long-term investing.

The purpose of this list is to highlight (lowlight?) some of the least shareholder-friendly activities by companies or individuals in 2000, as well as some trends that were helpful in parting Fools from their money.

1. The old "Gin up the Revenues" trick
Although it may not deserve the distinction, MicroStrategy (Nasdaq: MSTR) may well be looked upon as the pebble that caused an avalanche. In early March, just as the Internet and technology stock frenzy was at its peak, MicroStrategy announced that it was restating more than two years' worth of earnings and revenues. It seems the company was using an, ahem, aggressive acceleration schedule for its revenues, booking contracts in advance, putting sales into previous quarters, and so on.

Trouble was, by restating, MicroStrategy -- which at the time sported a triple digit P/E ratio -- went from showing profits over the two-year period to losing money. Oops.

From the time that this issue came to light, originally in a Forbes article, MicroStrategy's stock dropped from a high of $333 down to $90. It has fallen ever since, down to near $10 today.

2. The old "Gin up the Revenues" trick, redux
Belgian phenomenon (when was the last time you heard THAT phrase?) Lernout & Hauspie (Nasdaq: LHSP) -- this year's "next Microsoft" -- turned out to be the "next MicroStrategy" instead. By using dummy companies to parse off its own research and development efforts, Lernout & Hauspie, replete with its strategic investments from Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC), and others, blew up in November, filing for Chapter 11 in the U.S. and similar protection in Belgium.

The company reported growth of 60,000% in Korea in 1999, which, apparently unbeknownst to L&H headquarters, was largely bogus -- as was the $100 million in cash its Korean subsidiary claimed to have in the bank. TheStreet.com's Herb Greenberg had ridden this story for more than a year, seemingly to the exclusion of the rest of the public markets. Lo and behold, Herb was onto something. Moral of the story: If you disagree with Herb Greenberg, keep your trap shut.

3. Big, Fat Crocodile Tears
Ah, the analysts. The "protect us from ourselves" financial community. In the comment period for the now-enacted Regulation FD, the Securities Industry of America (SIA) claimed they required preferred access to corporate information because individual investors could essentially not be entrusted to properly handle and analyze it without their help.

Regulation FD, if you recall, was outgoing SEC Chairman Arthur Levitt's pet project that forced public companies to make pertinent information available to all investors at the same time. No more closed-door analyst meetings, no more private phone calls just before the press release. The public markets are in fact a Darwinian institution, and there are those whose returns won't be helped by FD, but the notion that most investors somehow require culling by the Wise is preposterous.

Going back to one of the first events of the year, the Lucent (NYSE: LU) blowup, exactly zero of the 38 analysts who covered the company -- one of the largest in the world -- bothered to ask questions about its ballooning receivables, its ever-expanding working capital, or its enormous inventory positions. These are basic "Accounting 101" issues, folks. And don't even get me started on all of the analyst downgrades AFTER some formerly hot company is down by 70% or 80%. Want to see the contempt in which the SIA holds you? Read this.

4. Worst Hollywood Trend
Movies, shows, and series about brokers. Even if they didn't suck, they'd suck. Talk about calling the high.

5. Most Seductive Trend
This one is close, and I'm not sure whether to go with the "dot-com craze" or the "B2B" craze. Maybe we can lump it in under the "new economy." Millions of investors wagered billions of dollars on dot-coms in the belief that they would overrun traditional commerce. You know, antiquated concepts like "making money."

But for every leader in the field -- profitable companies like America Online (NYSE: AOL), eBay (Nasdaq: EBAY), and Yahoo! (Nasdaq: YHOO) -- there were scores of me-too pretenders with no business plan other than to hold an IPO. I won't bring them up by name to kick them once again, as they've suffered enough. In the B2B space, one company, Internet Capital Group (Nasdaq: ICGE), spawned a frenzy like no other. Trouble was, ICG didn't do a whole heck of a lot. Down from $212 to $3, ICG has long been surpassed by companies like Ariba (Nasdaq: ARBA) and i2 Technologies (Nasdaq: ITWO) that have a good chance of succeeding. The year 2000 will be known as the year of the dot-bomb, so I'm going with that one. It oversimplifies -- it's perfect.

6. Let's Blow Something Up!
August saw an event that struck terror into my heart. In one day, Emulex (Nasdaq: EMLX), a $6 billion company, was halved when a newswire company ran a press release stating that the company was under SEC investigation and that the CEO had resigned.

Trouble was, it was a hoax, allegedly perpetrated by a poor schlub who had held Emulex shares short and was desperate to make himself whole again. Mark Jakob netted himself some $240,000 out of the scam, plus the opportunity to receive room and board for the next couple of years, courtesy of the FBI. The public markets only function in an environment of trust -- trust in information, trust in governance. That a harebrained scheme such as this could succeed in 2000, bringing a company to its knees in the process, is mortifying. Emulex quickly, and gratifyingly, rebounded. Those shareholders who sold in a panic based on bad information did not.

7. Blame Someone Else
With the obvious exception of the Emulex case -- or other out-and-out frauds -- investors generally have no one to blame for losses but themselves. It doesn't keep us from trying, though. There is a pervasive attitude: "If my portfolio goes up I'm a genius. If it drops, someone else was responsible."

As such, there's been a lot of blaming going on of late. We will all make mistakes in our investing career. Blaming someone else may feel better, but it's not going to help you learn. You may have lost badly this year, but unless you figure out what mistake YOU made, you're going to be right here in this spot some year down the road, wondering what went wrong. Most of the losses in 2000 were caused by mistakes made in 1999, or earlier.

Is there a mistake waiting to happen in your portfolio right now? This would be a very good time to try to discover it. Read company financials, gain deeper understanding of the company, of its industry, of its customers. Let that mistake truly be someone else's next time around.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards