FOOL ON THE HILL
UnWired, ReWired, and CrossWired

The Wired Index was launched in June 1998 as a way to track the movers and shakers of the new economy. Well, it's done just that, but not necessarily in the way its creators had envisioned. After one year, the magazine cover trumpeted 81% returns. In 2001, the lead story was entitled "Ouch." Now Wired magazine marches on with its 2002 Index list, 20% of which are new additions.

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By Bill Mann (TMF Otter)
June 14, 2002

In June of 1998, Wired magazine launched a pretty nifty feature -- the Wired Index. This was a group of 40 companies -- in the words of the magazine's editors -- "to track the growth of the companies that are building the new economy." It was (and is) a great idea at its core: to build an index based upon the companies that best represent certain attributes that you find important. The interim experience of the Wired Index suggests something else: Ya better make sure that those attributes ARE important.

When this issue came out, I thought that our friends at Wired were a little bit full of themselves. Yes, the Wired Index was and is a nifty idea. Only six months later, The Motley Fool would launch its own index, the FOOL 50, though our mandates and criteria for inclusion were fairly different. But the marketing pitch for the Wired Index was way over the top. The issue's cover featured a large neon up arrow and the claim, "THE WIRED INDEX UP 81%" followed, in slightly smaller typeset, "Your guide to exploding wealth."

The timing and choice of marketing words in the 1999 issue are quite painful to read in hindsight. (And those who brought you "Crush the Market in 15 minutes a Year" say "Amen!"). It is much more so given the sober (if somewhat presumptuous) prose used in the introduction of the index in 1998: " If it isn't already obvious, the Wired Index is not an investment fund designed to beat the market -- it is the market...." But by the end of 1998, Wired had licensed out its Index to a fund manager, Investec Funds, to create the Wired Index Fund. Given that 81% rise in price over the course of year one, one should not be surprised that the folks at Wired were pretty giddy.

Fast forward to today. This month, Wired marked the fourth anniversary of the Wired Index with its annual update. There may be no better measure for the change of atmosphere around the Index than the little meme that Wired includes on the cover of every issue. In June 1999, it was "Optimism Pays." This month's is "Buy Low." Buying low is what one would be doing when it becomes clear that optimism has done nearly everything but pay. For those who bought into the Investec Wired Index Fund on the day of the June 1999 blowout launch issue, the returns have been dismal: a loss of capital of more than 41%. Where each Wired issue once had a chart marking the progress of their index, now, even in the anniversary issue, no such performance chart is to be found in the magazine.

Of course, this has been a grueling market for exactly the same kind of issues that would attract Wired's fancy in the first place. But even in this environment, some of the selections have just been stunning, and the rapid-fire replacement schedule for the Index components make me wonder whether Wired knows what an "index" is at all.

Consider this: In the three years since 1999, this index of 40 companies has had 22 composition changes, for an annual turnover of well over 20%. Two companies, Monsanto (NYSE: MON) and Dell (Nasdaq: DELL), are making their second appearances in the Index. In the 1999 issue, the Wired Index managers had this very indexy thing to say: "In keeping with the founding principles of the Index, we will change the WIRX's component companies only when a takeover, bankruptcy, or some other corporate transmutation takes a company off."

Read the Investec prospectus for the Index, and you see an additional reason for withdrawal: "lack of representation," whatever that means. But many of the companies that have been removed -- Acxiom (Nasdaq: ACXM), Applied Materials (Nasdaq: AMAT), Cable & Wireless (NYSE: CWP), Dell, Lucent (NYSE: LU), Marriott (NYSE: MAR), Nucor (NYSE: NUE), Parametric Technology (Nasdaq: PMTC), PeopleSoft (Nasdaq: PSFT), i2 Technologies (Nasdaq: ITWO), Thermo Electron (NYSE: TMO), and Wind River Systems (Nasdaq: WIND) -- are dramatically the same corporate entities they were when they were in the Index. That's an awful lot of "unrepresented" companies and some pretty high-profile ones at that.

Of the initial 40 companies that were "building the new economy," two -- Globalstar and Enron -- have declared bankruptcy and three -- Lucent, WorldCom (Nasdaq: WCOM), and Qwest (NYSE: Q) -- are selling off assets in order to survive.

The combined companies in the Wired Index list lost $30 billion in 2001, including such treats as JDS Uniphase's (Nasdaq: JDSU) $56 billion loss and Vodafone's (NYSE: VOD) $14 billion gack.

Why is my goat up about this? Certainly, Wired didn't see the future coming back in 1999 in terms of the stock market. But they sure acted as though they did, and they were willing to (even if indirectly) manage people's money based on this conception. Reading the feature article in this month's issue makes me think that they still have not learned this basic lesson. In it, James Surowiecki states that, as of today, "the economy has emerged from recession far sooner than anyone expected" as part of a thesis that the "new economy" really existed. Flip a few pages, and there is an ad from Investec, imploring people who "want to take advantage of U.S.-led global recovery" to check out the Wired Index Fund, made up of companies "poised to prosper from the return in market confidence."

Surowiecki and Wired certainly have something correct: Technological changes have transformed much of the U.S. economy, and many of these changes have been obscured or dismissed by the frothy excess of the late-1990's stock market. But how can a group that screamed in boldface during the height of the 1999 madness that "the future is undervalued" try to make economic prognostications now? How could Surowiecki actually be saying that the economy is emerging from recession? At best, the signals are mixed. And remember this: It was only in November 2001 when economists stated that we had been in recession -- since March 2001. This, after the entirety of 2001 had been spent by the Federal Reserve dropping the Federal Funds rates to stimulate the economy.

And we are expected to simply take a blithe "We're emerging" statement at face value? I don't think so -- not from someone who thinks that this fait accompli recovery has happened faster than anyone expected. Oh, really? What was that whole rigamarole in 2001 about an economic recovery in the second half of the year? As soon as the Fed began dropping rates, the talking heads were on the airwaves saying, "Nine months. Things'll get better nine months after the rate cuts take place." Things haven't gotten better. Apparently, it took economists 10 more months to determine, retroactively, that things had gotten bad.

Had Wired not come on so strong in 1999 with their "guide to exploding wealth" nonsense, I doubt we'd have much to talk about today. Now, with the funds of investors in the Wired Index Fund seeing their money at less than half of what it was at the peak, one must ask whether the decision to call this non-diverse group of companies is an index at all. As it is, with rapid additions and deletions, I'd say that they have devised what is better described as a portfolio. In 2001, Wired quoted James Morgan, CEO of "Index stalwart" Applied Materials in the close of its report. Now, a year later, Applied Materials is no longer in the list. Seems we're even going through a little "stalwart deflation," huh?

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

Bill Mann, Senior Investing Editor at The Motley Fool, is the Chief Trustee of the FOOL 50, which has no financial products attached to it and has a total turnover ratio of 4% per year. He has beneficial interest in Cable & Wireless. The Motley Fool is investors writing for investors.