Yesterday the Nasdaq finally bested its record high set in 2000 at the zenith of the tech frenzy. This has occasioned a lot of “Where Are They Now” type features on many of the boosters of that bubble: Mary Meeker, Henry Blodget, Ryan Jacob, Jack Grubman, Frank Quattrone, and Paul Meeks.
Technology is not a sector that I’m generally interested in investing in because economic moats are so hard to find in that area. A tech company is only as good as their last product. Many tech companies seem to be about one product cycle from extinction. As Blackberry and many others have shown, you can be on top of the world at one moment, and then practically out of business five years later.
I skew more toward Warren Buffett’s skepticism toward investing in innovation. While great innovations improve society, innovative sectors are many times not great wealth creators — as experience has shown with autos and aviation. But I think there are a couple of great lessons we can take from the Tech Bust.
Jason Zweig reminds us that at the peak of the bubble, people were paying “dozens or hundreds of times” the long-term S&P 500 average of around 16 times earnings. And the thing is, at the height of the bubble it made sense to a lot of people, because their neighbors were getting rich by forgetting about valuation and just buying at any price. Which worked until the greatest fool had bought in.
“Success in investing is not a function of what you buy. It’s a function of what you pay.”
— Howard Marks
Cash Generation Is Key
Most of the high-flying Internet stocks had negative cash flow in 2000. The term cash-burn rate became the only metric that mattered once the air went out of the balloon. A company that cannot fund its operations through organic cash flow doesn’t have much of a future.
Paul Meeks, one of the Tech Bubble stars listed above, has bounced around since the Tech Bust and is again running money, although he is targeting very different companies these days. As he says in this article, “If it doesn’t generate cash, it’s not really a business.”
Words to live by.
“At a healthy business, cash is sometimes thought of as something to be minimized – as an unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.”
— Warren Buffett