Post of the Day
February 15, 2000
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
The Empire Strikes Back
So The Washington Post company is spending $50 to $70 million a year on internet development. I am reminded that the Post owns cable television companies, content, and brand names, the very same assets that attracted AOL to Time Warner. It may very well be that when Buffett was buying large blocks of Post stock in 1974 he was not just buying a cheap stock as conventional wisdom might hold, but in addition was looking well into the future for a really great internet play.
Besides The Washington Post company and GEICO, are there other internet assets in the Bastion of Old Economy that is Berkshire Hathaway? Buffett owns a big hunk of Disney as well. It appears that Disney is willing to suffer losses of hundreds of millions of dollars every quarter in the development of its internet strategy with Go.com. What are the other sites to do? If, in order to keep your name in front of the public, you are forced to spend more advertising dollars per quarter than you receive in revenues during the entire year, how do you keep up with a competitor with the deep pockets and name recognition of a Disney? How many of the thousands of internet start ups can go back to the capital markets two or three times a year to raise money for television advertising?
But forget Berkshire Hathaway. What of companies like News Corp? I have owned stock in News Corp for a long time, watching Rupert Murdoch build a fourth television network, Fox, from scratch, watching him build huge distribution systems like BSkyB, and getting his hands on about half of the cable television channels on the planet. Murdoch seems to know what he wants and how to get it, and he has turned his attention to the net. I have no doubt that News Corp. will be very successful in this area.
|"...because in the final analysis there is no new economy and old economy, only people who think in those terms."|
These examples should come as no surprise. All of these companies are grounded in content and its distribution. Television is actually the grandfather of the internet. The internet has given the ability for one station, owned, managed and run by you, to place its content before many, just as a late night television newscast does. It has added the additional benefit of interactivity which it acquired from telephone systems and their switches. You, your computer, and your internet connection have become the equivalent of a television station on steroids. But when it comes to helping you and your TV station and delivering and receiving content, whether it be news, entertainment, classified adds or reader feedback, who is in a better position than television stations, newspapers, magazine publishers, movie studios and cable television channels? AOL couldn't think of any. And companies like Washington Post, Disney and News Corp. have been doing these things for decades.
Tomorrow, the empire strikes back. And Berkshire Hathaway will be part of the attack.
This is because in the final analysis there is no new economy and old economy, only people who think in those terms. To identify part of the economy as "new" is to make an arbitrary and completely erroneous distinction between companies, industries, and most importantly, the role that change plays in the economy. Such "new" and "old" talk is a distinction without a difference.
Investors who create these impossible walls of distinction in their minds are making a mistake, and an potentially expensive one at that. If they claim that this "New Economy" has vanquished the representatives of the "Old Economy" they are banking their decisions on the perpetuation of a New Status Quo. In order to support the valuations that have been placed on many "New Economy" type companies and industries they must be assuming that the revolution is over, that they have won, and that counter revolutionary activity is impossible. They are imagining smoke filled rooms where the representatives of the New Status Quo are dividing up the slots in this new economy among the players. If such a thing had happened I imagine eBay was pretty upset with the outcome. There are now more than 400 auction sites it must compete with. eBay would have been much better positioned if the meeting had been held a year or so ago. But it could be worse. It could be selling shoes and competing with the 1,500 e-commerce shoe sites on the net. The "New Economy" companies are anything if not profligate.
|"...the irony is also this: that the investors being dismissed today as being old fashioned value hunters are the ones most accustomed to looking out many years into the future..."|
There is an irony in all this. The champions of the new economy type companies herald their triumph over other, less with-it, investors such as those who buy stock in Berkshire Hathaway. They base their victory on their ability to embrace and understand change. What else could the talk of paradigm shifts be? Surely they a not so silly as to argue that the rules for valuing companies have become obsolete. A security is still worth the net present value of all future free cash flows whether it makes computer chips or potato chips. The only paradigm that I can imagine shifting is the resulting change on our society from the intersection of various technologies, new and old, to create powerful, new means of communication. A significant achievement in itself. Maybe even a paradigm shift. But at the end of the day, we are talking about change, and the ability to profit from it. This is an economic and societal change for sure, but not a paradigm shift for stock valuation methods.
So when companies are being valued at 100 times next years sales, the "New Economy" change has been capitalized at a pretty big number. The only way such valuations can be considered close to reasonable is if the revolution is indeed over, the "Old Economy" companies are beaten, and some unholy cabal containing only themselves and no one else has successfully conspired to keep new and different technologies and ideas from upsetting the New Status Quo. Such thinking may be some of the most short sighted thinking in the history of investing.
So the irony is this: the "New Economy" champions belittle all the other investors that "just don't get it," claiming that such people cannot understand the effect that change will have on society, but at the same time completely ignore that this same change process that they value will eventually undo most of their achievements. If you do not hear the argument in their words you can hear it in their actions while bidding up stocks of new economy representatives to unsustainable heights.
And the irony is also this: that the investors being dismissed today as being old fashioned value hunters are the ones most accustomed to looking out many years into the future in their attempts to determine the sustainability and predictability of earnings. And these value investors who "just don't get it," are actually looking more closely at the role of change than any of the tech.com traders who can't see past tomorrow afternoon's closing quote.
A delicious irony that.
So if you are looking at purchasing Berkshire Hathaway stock today, rest assured that you are in the minority. And if you have tried to understand this economic creature, and project what it will look like next year, or the year after that, also be assured that you are looking much further into the future than most other investors. So you are seeing the world differently. You actually see tomorrow as a day different from this day. Invest your money based on what tomorrow holds out in hope, not what today offers in fear. Remember, impermanence is. All things have it within their nature to change, this market included.
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