Burning Fast: The Pain of Being Right

In March of 2000, Jack Willoughby of Barron's wrote a feature predicting the demise of more than half of the 200 Internet companies. For 51 of these companies, survival through the end of the year was in doubt. Two years later, Bill Mann looks at the dot-com wreckage and wonders why people were so angry with Willoughby. After all, he was right.

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By Bill Mann (TMF Otter)
August 30, 2002

It may seem like ancient history now. What was going to happen certainly seems bloody obvious, in hindsight. But in March of 2000, Barron's Jack Willoughby penned the article "Burning Up," arguing more than half of all publicly traded Internet companies were in danger of running out of cash -- 51 of them by the end of the year. His reception from the investing community was none too kind, to say the least.

More to the point -- people freaked.

One would expect the managements of the profiled companies to flip out. Here is one response from an executive from one of the accused, NorthPoint Communications:

To the Editor:

"Burning Up" was days late and a half-billion dollars short.

Take NorthPoint Communications, for example. We are ideally positioned for the communications industry's best growth opportunity: the $40 billion global market for broadband services. NorthPoint operates the largest DSL-based broadband network in the U.S., offering high-speed Internet access to a subscriber base that has doubled in each of the last three quarters. And, we are growing revenues at the same clip.

Most importantly, our war chest to attack these opportunities has never been stronger. In this regard, Barron's shortchanged NorthPoint by more than a half billion dollars. Building on what was one of the highest-valued IPOs of 1999, NorthPoint in January raised an additional $400 million in the public debt market, an event unaccounted for by Barron's. You also failed to recognize $165 million in undrawn credit facilities available to us. To date, we have raised $1.2 billion, demonstrating the financial community's confidence in our ability to lead the broadband revolution.

Please update your numbers.

Liz Fetter
President and CEO

Yup, Willoughby blew it, all right. NorthPoint was bankrupt before the end of the year. But it wasn't just the executives of these companies. Individual investors were also livid, calling the article "shoddy and inaccurate," and the reporters and data-collectors "lazy," among other, less family-friendly things. Henry Blodget jumped to the defense of his client, VerticalNet (Nasdaq: VERT), calling the analysis to question and stating VerticalNet had a "clear path to profitability." Even staid jumped onto the dogpile, saying, "Barron's takes a good idea and ruins it."

As a matter of fact, VerticalNet still exists more than two years later, so Blodget was right about that much. But it never achieved profitability, and it trades at a hair over a buck today, compared with a reverse split adjusted 919 at the time of the Barron's "hatchet job." I doubt there has ever been a more Pyrrhic victory. "We've lost 99.9% of our value, but we're not bankrupt!! Yay!"

In the current investing environment, Internet shares are nothing more than a convenient whipping boy, symbols of the excesses of the 1990s. At their height, the 371 public dot-coms' combined market capitalization was $1.3 trillion dollars, about 8% of the entire U.S. market. So although significant portions of the market can claim they didn't play along, it's clear that a huge number of individual and institutional investors believed in the Net. As such, Willoughby's piece was a clear assault on many people's hopes for a life in clover. 

Few people jumped to defend Willoughby or Barron's. Well, we did... sort of. No one who questioned Willoughby's motivation, intelligence, genetic make-up, or fitness for reproduction has come back and said the obvious: Not only was his research correct, but it was eerily prescient. March 2000 was the high point, the moment the music stopped, and we missed it.

Of the 51 companies Willoughby slated to run out of cash in 2000, only 15 are still listed on a major exchange. A few, most notably CDNow and Digital Island, were acquired, but at fractions of their March 2000 cost. Most have simply ceased to exist, taking every penny of investor capital with them.

It doesn't get any better when you look at the more extensive list. Of the 207 total companies, only 32 currently have market caps over $100 million, including Multex (Nasdaq: MLTX), (Nasdaq: AMZN), (Nasdaq: DSCM), WebMed (Nasdaq: HLTH) LookSmart (Nasdaq: LOOK), (Nasdaq: BNBN), Ticketmaster (Nasdaq: TMCS), TriZetto (Nasdaq: TZIX), Openwave (Nasdaq: OPWV), and E*Trade (NYSE: ET). In other words, the carnage has been massive.

How could these companies, which were apparently mostly destroyers of capital, garner such an enormous portion of the U.S. market? I still can't believe many even made it to the public marketplace. More importantly, how was the incredible risk hidden, though it was in plain view? None of these companies were making money.

The pitch and hue after Willoughby's article was a prime sign that these investments were likely to end badly. It seems that many investors confuse the approval of the herd with the definition of a good investment. Further, it seems some would rather attack and win an argument than analyze. Winning the debate in investing doesn't make you 'right.' Being on the best side of a risk-reward continuum makes you right. Investing in companies with good balance sheets, priced below their intrinsic value, makes you right. Belittling a columnist does not.

I'd imagine Jack Willoughby wondered for several weeks if the column was worth the aggravation. I doubt he reveled in the damage done to those who held onto companies with no chance of providing market-beating returns -- or even surviving, for that matter. Those sorts of predictions are always somewhat bittersweet. It is truly -- when you're forecasting misery -- the pain of being right. When I opined that telecommunications debt had the potential to drag down the entire economy, that's exactly how I felt.

Still in Willoughby's case, a trillion dollars in phantom-market value later, you'd hope he got at least one letter from a former tormentor, saying, "Geez, man -- you were right."

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Bill Mann's most recent ploy with telemarketers is to repeat the phrase, "Can you hear me now?" until they give up. He owns none of the companies mentioned in this article. The Motley Fool has a disclosure policy.