[Yesterday, as we announced we would a week ago Monday, the portfolio purchased shares of Human Genome Sciences (Nasdaq: HGSI). We bought 590 shares for $25,405.60, including our $8 commission. Our cost basis per share is $43.06.]
Ever see Wall Street Week on PBS? Admit it: Sometimes you spend Friday night collapsed in front of the TV. Want to hear something pathetic? For about five years, I would come home from work on Friday night, turn on the MacNeil/Lehrer News Hour, and fall asleep halfway through -- usually just after Shields and Gigot. I might wake up for Louis Rukeyser, which I rarely watched, but more often than not, I'd wake up the next morning. Sometimes, but not always, there was beer involved.
Let's get it straight about Rukeyser: His show is financial entertainment, not education. It's an advertisement for money managers who share no long-term performance information, and it does little to educate individual investors -- the very people who presumably lead major underwriters to fund the show.
Yet he did educate me once. Not on his show, but in some mail soliciting for his newsletter. (I was lonely that day and reading the credit card solicitations, too.) He maintained that the long-term direction of stocks was up, because there was a decreasing supply of shares available. According to him, stock prices would increase, because given even steady demand for less of a product, the price of the product will increase.
Stripped-down economics
I have no idea if he was right that the number of shares of stock of corporations traded on the New York Stock Exchange has increased or decreased since World War II. But it made sense. Since I had been in the single digits, my father had impressed upon me certain basic economic principles. Other kids played catch with their dads, but mine was too old for that, and nothing was more important, as far as he was concerned, than the Law of Supply and Demand. All things being equal, if the supply of a product exceeds demand, its price will decline. If demand exceeds supply, the price will increase.
This is important. We saw in the recent market runup to the spring of 2000 a huge increase in demand for shares. Initial public offerings exploded, and demand became so intense that investment bankers often failed to price an offering properly, seeing first day prices double, triple, and more. Even with huge amounts of new stock entering the marketplace, demand exceeded supply and prices jumped. Demand was so great that investors were willing in effect to become venture capitalists, providing development capital to companies that would in less friendly markets rely on private venture capital, if available.
Today, demand has dried up, and the market averages have declined precipitously. Fewer people want shares, so sellers must accept lower prices if they want to unload. Investors are less willing to act as venture capitalists, and IPOs and secondary share offerings are way down. Private venture capitalists are wary.
Though this last such cycle was dramatic, investing history shows that they come and go. Two great reads that show these booms and busts are John Brooks' Once in Golconda (the Crash of '29 and aftermath) and The Go-Go Years (the 1960s and early 1970s).
Many factors affect demand. In a rational market where information is available equally to buyers and sellers, prices will reflect supply and demand based on a business' prospects. They will fluctuate less in established businesses with more predictable businesses, but newer, unprofitable businesses are not so easy to value.
For some of those businesses, it's fun and instructive to read our Motley Fool 1999 wrap-ups on biotechnology, wireless, and broadband. The wild increase in shares of companies mentioned in those columns from the latter half of 1999 through spring 2000 may have been part speculation or momentum or what have you, but clearly there was increased demand for shares coupled with wide disagreement about the value of those businesses.
Biotechnology and information
Back then, who could say for certain whether bioinformatics company Celera Genomics' (NYSE: CRA) sequencing of the human genome meant huge future free cash flow, and if so, when? Buyers outstripped sellers, and the stock price rocketed from a split-adjusted closing price of $23 on Nov. 18, 1999 to close at $247 on March 6, 2000. The company hadn't sold a single database subscription. Yesterday, the shares finished at $25, when Celera's business is still uncertain but generates real and increasing revenues. It's on track to take in over $100 million this fiscal year (and, incidentally, spend twice that on operations).
Does anyone doubt that advances in biotechnology will change the face of health care? Yet does anyone really know when, how much, and with what winners?
Wireless communications
What about Qualcomm (Nasdaq: QCOM), whose CDMA technology was believed to lead the way in a world of so-called third generation -- 3G -- high-speed wireless voice and data communication? It sold for a split-adjusted $25.08 a share on May 21, 1999, and closed at a high of $179.31 on Jan. 3, 2000. Yesterday it closed at $51.80. Third-generation services have been delayed, and the move to Qualcomm's CDMA -- while substantial -- has been less than a stampede. In Europe, large telecoms spent wildly for radio spectrum licenses necessary to offer 3G services, and it's now unclear whether and when they can make real money from offering the service, regardless of what technology they use.
Does anyone doubt that high-speed wireless communication will become more and more common? But does anyone know which providers -- of service or infrastructure -- will be able do so profitably, when, and to what extent?
Broadband breakdown?
I read in The Wall Street Journal yesterday that growth in high-speed cable and DSL Internet subscribers has slowed. The column discussed the economics, alleging that gross margins for dial-up were much higher, and that telecoms had less incentive to push DSL. On the cable side, the article suggested that Excite@Home's creditors were pushing to end the service, though I find it unlikely that a bankruptcy court judge would agree, because it would kill any chance of the reorganization that was the goal of the company's Chapter 11 filing.
Does anyone think that high-speed Internet service will not advance? Surely not. But does anyone know for sure when, or whether and how it can be a profitable business, or how to value a broadband service provider business today?
With all that uncertainty...
You might think that with this much uncertainty, investors should stay away. And they should, if they have no strategy for getting a handle on a business and its prospects. The Rule Breaker strategy is just one strategy, and it is not for everybody -- in fact, it's probably not for most people. It entails extraordinary volatility and risk. It's very much a strategy in development, one that changes as we learn, including what we share as a community on the Rule Breaker Companies, Strategies, and Beginners discussion boards.
No question, it's hard to value a business with uncertain prospects, especially in the short term. Those who put any money in stocks of the Rule Breaker type had better be prepared for wild fluctuations while the market works out how to value the business's ability to generate free cash flow in the future. What was popular one day may not be able to buy a kiss tomorrow. You can count on it.
What bothers Tom Jacobs (TMF Tom9) the most about Louis Rukeyser is the way they put the camera on him in the opening. What kind of angle is that? Tom owns shares of Celera Genomics and Human Genome Sciences. To see his other stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
