Today we share the remaining thoughts of Mr. Anil Khatod, president of Global Internet Solutions at Nortel Networks (NYSE: NT), from our recent interview. We first talked about optical Internet, then about wireless, and today we discuss local Internet, Nortel's leadership categories, and the stock's volatility.

Mr. Khatod and I had a brief discussion about what is called the local Internet. The local Internet is defined as the Internet backbone inside a city. There is a need to store more information locally, through caching in high-traffic areas, and to provide higher speeds of transmission. This will allow faster access for city Web users.

The items addressed are optics and how far they extend into the networks; and the extensive copper, coaxial cable, and fixed wireless that is in place. Much of the work that has been done so far on the Internet backbone has been intra-city. So, upgrading networks inter-city is an area of growth that Nortel plans to continue to lead.

Mr. Khatod then described what he calls Nortel's leadership categories. They are:

1. Optical Internet: 2% of what will be needed in four years exists now. Nortel carries a 43% market share in this high-growth area (which is analyzed closely in the new Motley Fool Research Internet Report).

2. Wireless Internet: There is growing demand for a great deal more wireless bandwidth. Nortel's "Untethered Access" growth is two times the rate of the market's overall growth.

3. The Local Internet: What has been done intra-city must be done inter-city.

4. Content Networking: This has been accomplished with the acquisition of Shasta and Alteon. Alteon provides intelligent content switching. Shasta provides intelligent services that allow providers to tailor content to individual preferences, firewalls, and Virtual Private Networks (VPNs). Mr. Khatod emphasized that it is important to get content to the consumer as fast as possible, and these products help by tailoring it and determining whether the content must come from near or far.

5. Professional Services: Nortel builds networks around the globe and provides network management services to carriers and networks. One good example is the $1.4 billion contract that Nortel announced with Cable and Wireless (NYSE: CWP) on October 2, 2000. In this contract, Nortel Networks will "plan, design, implement, and operate the Cable & Wireless VoIP backbone network, which will extend throughout Europe and North America."

The Stock Price and Hysteria!
I can't get away without a mention of Nortel's stock performance last week. Beyond the numbers that were reported, I feel what happened was simple hysteria.

I've written some rather tongue-in-cheek articles about the "Hysteria Index," which is an index I invented that has no basis in any research or provable facts. I guess that would qualify me to get big bucks talking about it on TV. Well, instead of that, let me discuss the Hysteria Index as I see it, and how it reared its ugly head and bit Nortel in the neck.

There are some excellent books about efficient markets; Malkiel's A Random Walk Down Wall Street is especially good reading. The idea is that the stock market is one big computer that efficiently evaluates a stock's value on the basis of all known news. The only way to beat that big computer is by having some news no one else has.

It sounds good, but it forgets that computers don't invest in the market, people do. People get emotional about their stocks and debate them in discussion boards, chat rooms, and news groups. They hype them to their friends. Portfolio managers will "window dress" their mutual funds with hot stocks. Analysts get on TV and hype their favorite stocks. In short, a stock can get very popular, much like an actor or rock group. When it does, its Hysteria Index goes through the roof.

What happens to rock stars? They usually are forgotten pretty quickly. The mood of the public moves on, and no one cares about Peter Noon. (Any of you older people remember Herman's Hermits? He was Herman.) Very, very few rock stars ever become something like the Beatles.

The same happens with stocks possessing high Hysteria Indexes. Something happens to disappoint people, however minor, and the stock drops like a rock. Or, it just gets forgotten by its fickle fans, and the stock falls slowly but surely. Ultimately, I believe Malkiel's "efficient market" takes over, and the stock gets more or less to its real value. That only occurs after the Hysteria Index has dropped. The Hysteria Index can cause stocks to be valued at both above and below their "true" values.

How do you know if a stock is fairly valued? As I've said before, it's difficult, if not impossible. That's why I favor Drips. You can simply dollar cost average to protect yourself and to develop a favorable cost basis.

Coming back to Nortel, the Hysteria Index for anything "optical" got Nortel Networks both ways -- up and down. It really doesn't matter for us long-term investors and especially for Drippers -- the company stays the same, and so does our pattern of investing.