Debunking Myths About eBay
Why "they" are wrong again

By David Gardner (DavidG@Fool.com)

ALEXANDRIA, VA (March 3, 1999) -- The Rule Breaker portfolio rose 0.62% today, beating out modest gains by the S&P 500 and the Nasdaq. It was a nice mini-recovery following a poor market day yesterday. In the grander scheme, our 1999 return is now 13.24%, ahead of the S&P 500's 0.19% and the Nasdaq's 3.31% gain. In the grandest scheme -- and really, the only one that really matters -- we're up 1036.59%, vs. gains in the S&P 500 and Nasdaq of 181.38% and 214.53%, respectively.

Our annualized return is presently 70.11%, which is -- oh, about 50 percentage points higher than I thought we would score when we started this whole shebang on August 4, 1994.

You realize, of course, that 70% annually is unsustainable. That said, we focus on beating the market IN THE FUTURE and will always remain focused on that. Taking risks comes to Rule-Breaking investors naturally -- we don't sit back and count our past returns.

Perhaps no better illustration of that mentality exists than our recent purchase of eBay. There's a stock that itself has a lot of really nice-looking past gains. And yet we obviously bought it solely with expectations that we'll see future growth. And in doing so, we took a large risk in many people's minds, who think "it's already had its run," or "it is going to get killed," or "it's grossly overvalued."

Ah yes, that lovely phrase "grossly overvalued." As any regular reader now knows, that's exactly what we CRAVE to hear -- it's the sixth attribute of Rule Breakers. I'm hearing it so often today applied to eBay, just as I'm hearing the whole Internet called a "bubble" by the media everywhere. It's one of the great conventional Wisdoms of our time, but you don't tap into this page each night expecting to hear Wisdom, do you?

Regarding the "Internet bubble," I'll let 7NoTrump (nice screen name) from our Fool community briefly and succinctly state her opinion (and my own) on the matter: click this.

Back to eBay. I want to look at a few myths that clog our message boards right now on that topic. The great thing about it is that they're the same myths I was reading about AOL five years ago, and Amazon two years ago. Are we going to make as much money in eBay? Probably not, because it's already priced at $12 billion. (I was following the stock prior to its IPO -- I'm a bit sick about that.) That said, if the business plays out the way we think it will, we should make several times our money in the years ahead... of course, we've been wrong before!

While the present-day valuation may cause one's eyes to bulge ever so slightly at the tip of the pupil, I remain very bullish on eBay stock over the long term. Why? Well, one primary reason is the continued misunderstanding about eBay that I find in the media at large and some of our message boards in particular. Check out our eBay board and you'll find a bunch of thinking that doesn't work.

Let's take a few examples.

First is this (actual quotes, here):

"Something I did not even mention earlier is that it is not simple to successfully sell an item on eBay. It has to be photographed, described properly and correctly categorized. One might think this is simple and obvious, but it actually requires some effort. Then, once you have received payment (and waited for the check to clear), you have to pack and ship the item, and deal with issues of lost/damaged/stolen packages, and unhappy buyers who did not get quite what they expected. This is not something the average person is going to want to deal with."

This argument effectively says that the business can't work because average people don't have the time or the energy to actually buy and sell over eBay, with all that this entails. What's wrong about this -- and quite funny when you think about it -- is that the actual numbers clearly demonstrate that the business is working. eBay did $19.5 million in profitable sales last quarter alone, versus $2.6 million in the previous fourth quarter. That is an amazingly fast ramp rate, for a profitable model. Also, having done an hour on the subject of eBay on our Motley Fool Radio Show a few weeks ago, I have heard firsthand the fanatical love for the site among a growing number of people who spend an hour or more every day at www.ebay.com. That's true of very few sites, anywhere in the world. I love to see fanatical customers -- a great Rule Breaker sign.

This particular myth reminds me of early arguments against Amazon.com, about how it couldn't possibly succeed because people love the smell of books, they want to hold a book and browse through it, and won't buy information stuff sight unseen. These arguments were made passionately by bears in the face of tremendous sales growth. Same mistake back then -- same mistake being made today.

Another myth about eBay:

It's a niche market.

Is this a pure and inaccurate myth? Well, not necessarily. Maybe it's totally true. Maybe eBay IS a niche market -- but if that's the way you're looking at the world, then I think probably EVERYTHING is a niche market. And this is a rather large niche: a site that enables a huge number of people to buy and sell stuff (all sorts of stuff) between each other, one-to-one, in competitive auctions. Auctions, in the solely "physical" world of old business, may have been a small niche. But once you can find almost ANYTHING at a convenient online site that is running 24-7, including selling any of your own stuff anytime, you're talking about a gigantic "niche." This is not a marginal business. This business actually makes most other businesses look marginal.

Let's go over one more myth tonight:

I do not think that eBay has anything that cannot be displaced tomorrow by a competitor with deep pockets.

This is the same argument that was made against AOL, Yahoo!, and Amazon.com, and what is now evident is that all of these businesses haven't just stayed ahead of big potential competitors -- they have mostly crushed the competition. It simply is NOT easy at all for any competitor, even a deep-pocketed one, to spend the proverbial large sum of money and "buy victory." Especially on the Internet, where word-of-mouth, first-mover advantage, and momentum count for so much more than someone else's expensive advertising campaigns

When I see myths like this that are popularly held about a company that meets all my Rule-Breaking criteria, I buy to hold. Which is exactly what we did.

I want to correct one other myth I see on our boards. The buy report was solely written by our own Jeff Fischer -- all credit goes to him. I often see people saying "the Gardners' buy report" when of course Tom doesn't have anything to do with this particular portfolio, while Jeff in fact did the legwork and the keyboard work. All decisions on this portfolio are made jointly and solely by Jeff and me. What was kind of funny about our eBay buy is the way that Jeff laid out some of the analysis ahead of time, in this report, prior to any purchase. That was Foolish.

Speaking of credit, I want to give a shout out to two Fools, "washu" and "Mention," for their excellent reasoning abilities, as they are doing a fine job teaching people some of the truths you read above through the wonderful medium of The Motley Fool message boards. Our Fool.com message boards were named #1 for financial discussion on the Internet by PC Magazine last week, and that wasn't for nothing. That was because of all of YOU, our million-plus Fools worldwide, who come into the boards every day to breathe life into The Motley Fool. All I ask is that you bring your three best offline friends onto The Fool sometime this year, because the more great information we can pack into Fooldom, the better it is for all of us.

I wrote about stock splits last week. Here was a very funny parody post from one of our writers, David Marino-Nachison (TMF Braden), which is definitely worth a quick smile. Meantime, Starbucks is splitting soon, and @Home announced another one (for this portfolio) this week! Geez.

By the way, Tom and I are in Miami this weekend for The Miami Herald's Money Matters conference. Hope Florida Fools within "driveshot" will join us, and here's a link if you're interested. We'll be speaking in the afternoon and hanging out to sign books and gab at our Fool booth.

Fool on!

David Gardner, March 3, 1999

What's up with Harry Jones today?

03/03/99 Close

Stock  Change    Bid 
AMZN  +2 3/16 123.50
AMGN  -1 7/16  62.56
AOL   +  3/8   87.00
ATHM  -2 7/16 113.13
DJT     ---     4.25
CHV   +2 5/16  78.00
CAT   -  3/16  47.25
DD    -1       50.31
GT    -  3/4   47.25
IOM   -  1/8    5.94
SBUX  -  1/8   54.63
TDFX  +  3/8    12.25
EBAY  +6 7/16 123.50

                   Day   Month    Year  History  Annualized 
      R-BREAKER  +0.62%  -0.30%  13.24% 1036.59%  70.11%
        S&P:     +0.18%  -0.86%   0.19%  181.38%   25.37%
        NASDAQ:  +0.27%  -1.00%   3.31%  214.53%   28.46%

Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     87.00    9472.54%
   9/9/97  1320 Amazon.com     6.58    123.50    1777.12%
  5/17/95  1960 Iomega Cor     1.28      5.94     363.72%
  12/4/98   450 @Home Corp    56.08    113.13     101.72%
  4/30/97 -1170*Trump*         8.47      4.25      49.82%
 12/16/98   580 Amgen         42.88     62.56      45.92%
  2/26/99   300 eBay         100.53    123.50      22.85%
  2/23/99   300 Caterpilla    46.96     47.25       0.61%
  2/23/99   180 Chevron       79.17     78.00      -1.48%
   7/2/98   235 Starbucks     55.91     54.63      -2.30%
  2/23/99   290 Goodyear T    48.72     47.25      -3.01%
  2/20/98   260 DuPont        58.84     50.31     -14.50%
   1/8/98   425 3Dfx          25.67     12.25     -52.27%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 191400.00  $189400.53
   9/9/97  1320 Amazon.com  8684.60 163020.00  $154335.40
  12/4/98   450 @Home Corp 25236.13  50906.25   $25670.12
 12/16/98   580 Amgen      24867.50  36286.25   $11418.75
  5/17/95  1960 Iomega Cor  2509.60  11637.50    $9127.90
  2/26/99   300 eBay       30158.00  37050.00    $6892.00
  4/30/97 -1170*Trump*     -9908.50  -4972.50    $4936.00
  2/23/99   300 Caterpilla 14089.25  14175.00      $85.75
  2/23/99   180 Chevron    14250.50  14040.00    -$210.50
   7/2/98   235 Starbucks  13138.63  12836.88    -$301.75
  2/23/99   290 Goodyear T 14127.38  13702.50    -$424.88
  2/20/98   260 DuPont     15299.43  13081.25   -$2218.18
   1/8/98   425 3Dfx       10908.63   5206.25   -$5702.38

                              CASH   $9924.87
                             TOTAL $568294.25

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.


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