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Capitulation

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By Paytient
December 21, 2001

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I exited a very large and long held position of GX this morning on the PR. All of it.

This is, regrettably, the toughest decision I have ever made in my investing experience--and it hurts more than any past decision--because a lot of real money was lost with no hope of getting it back. It's not like I can deploy proceeds into something else like AX--there is virtually nothing in this investment left to deploy. This also strikes me right in the heart of my philosophy, which was never to sell a stock at its low AFTER a panic.

The recent news makes it clear that there is no longer any hope of a meaningful rebound in the common. GX will need to be financially restructured or its assets packaged and sold, and all of the possible scenarios I looked at pointed to a near wiping out of the equity. I intended to hold near term just to see if I could take advantage of a small January-effect rally and then get out. But with news surfacing that GX is trying desperately to get an equity infusion overseas, the fate of the company now seems certain. The stock bears a very high probability of going to zero. It's not worth waiting around for, perhaps, a rally to $1 or $1.50, when zero is the ultimate destiny. Anyone who sees it differently is just fooling themselves, IMHO.

Let's be mindful of one painful lesson here: Under normal market conditions, which no one has seen since the early 1990s, companies like GX would never have been valued at more than $5 or $6--not with that much debt and so little revenues. Only in the new world of accounting shenanigans and supercilious hype could a stock like GX ever rise to $20, $40, or $60. The problem was, once you reached a peak of $60, the peak took on psychological meaning as a relative hurdle. Every decline from $60 gave the appearance the GX was even more undervalued.

In the end, no company with debt greater than its revenues can survive for long without constant infusions of more capital--unless they have outstanding operating margins to cover the debt payments. Once the funding dries up, so goes the company. That's a basic metric of business whether you're studying a fiber optic company or a maker of buggy whips.

I need to think about these kind of traditional metrics with all "new-era" and old-fashioned businesses I choose to study going forward. If I can apply lessons learned from GX, ARCC, and GSTRF, the amount of money I can make, or even save, by applying these lessons will greatly exceed what I have lost learning the lessons.

I keep remembering: "Investing is a Loser's Game". Swinging for home runs isn't what gets you on top in the end. Avoiding strike-outs does. The fewer mistakes I make going forward, the higher my returns. It's that simple. A good company at a good price should be obvious to us all. If we have to stretch our imaginations and our financial projections to find value, it probably wasn't there to begin with. Guilty.

Will the last to leave please turn out the lights�.

Farewell,

Robert

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