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POTENTIALLY Disastrous


This post comes from a former life where I joined blogging luminaries such as Celticsblog‘s Jeff Clark, Baltimore Sports Report‘s Matt Sadler & Jeff Pilson, and theJetsblog‘s Brian Bassett to lay the groundwork for future blogger superstardom. The original post date (I promise you) was July 20, 2001 on the now defunct site, sportsrant.net.

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Hey kids, we’re here to talk about a very serious issue.  Let me throw some statements at you and see what happens.

“It’s all about future potential.”

“We’re going for the home run.”

“There’s a lot of conservative picks out there, and it’s always hard to pass up on them…but…”

“It’s not about status NOW, it’s about where it’s GOING to be in three years!”

So, I’m talking about the upcoming NBA draft, right?

Nope.

I’m talking about something different, but entirely similar, based on signs, hype, and what I think the future outcome will be.

I’m talking about Internet stocks.

I was inspired by Mr. Clark’s pre-draft piece and his analogizing players to different stock types.  In reading the various fluff pieces as well as the more thoughtful pieces on the NBA draft, I began to see a striking similarity between our current crop of young stud’s-to-be and the Internet stock phenomenon that took the nation by storm five years ago.  If you’re too young or too naive to remember, it was only in 1995 (long ago, and seemingly not so long ago)  that a little start-up called Netscape hit the scene and lit the fuse that was to become the Internet boom.  Even though they had no sellable product, no revenue, and certainly no earnings, Netscape’s initial public offering went through the roof.  For the next five years, thousands of Internet companies, nicknamed ‘dot.com’s,’ popped out of the woodworks.  Each one of them hoped to cash in on the red-hot Internet craze and capitalize on the greedy investors who knew for sure that any company that had the ‘dot.com’ in it’s name had to be a home run.

Unimportant to them were things like revenue growth, product development, fundamentals (interesting word there), and earnings sustainability.  All that mattered was that it was a company that nobody knew of, it had all the ‘potential’ in the world, and stock prices soared because of it.  Companies such as Amazon.com, Priceline.com, and Yahoo.com were all the rage, making the stock market, not baseball, our national pastime.  Never mind the fact that these companies had yet to actually MAKE any money; the consensus was that they HAD to…I mean, how could they not?  Sure, we the investors had no idea what they did or when they would become profitable, but the experts knew, didn’t they?

So the experts hyped them and the portfolio managers hyped them and the institutional investors hyped them and then individual investors hyped them…stock prices climbed higher and higher and higher and higher…until suddenly, all that held them up was their own hype.  Finally, it hit- savvy investors- those people who refused to listen to the talking heads and decided to do their own research and form their own opinions- said…”these companies suck!”  And it all fell to the ground like a house of cards.

Fast forward five years and you have the current landscape.  No longer are there companies like Pets.com, Dash.com, and Nextoffice.com making headlines and recording record stock price gains.  That ‘potential’ that everybody was willing to invest millions into was over-hyped fluff, a product of its own distorted view of reality.  It was a risk taken with the hope of a home run at the end of the giant swing.  They forgot that, ultimately, the companies have to actually PRODUCE something to warrant that huge stock price.  Unfortunately, not everyone possess the home-run hitting ability of a Mark McGwire or a Barry Bonds.  In fact, very few do.  They are guys like Warren Buffett and Peter Lynch, guys who ignored the hype, did their own homework, and said, “companies that succeed are the ones with good vision, wise leadership, and outperforming fundamentals.” (there’s that word ‘fundamentals’ again)  And they got hits.  Not always home runs, but an awful lot of base hits, doubles, sacrifice flies, and walks, and sometimes they even squeezed home the runner.  And they ended up putting together portfolios that contained stocks like Ron Harper, Derek Fisher, Robert Horry, Tyronn Lue, and Rick Fox.  Sure, they’re unspectacular, but they give you the foundation so that when you do hit the big home run and acquire a Shakobe, you have already got men on base and you can capitalize on the homer.

Do you see where I’m going here?  Do I need to lay it on any thicker?

Fine, then let’s take it one step further.  Say you do take that pick that’s got loads of upside potential, but you know virtually nothing about it.  All that buoys it is the hype that surrounds it.  How long are you going to have to wait for that pick to show positive returns?  If we use examples such as Kevin Garnett and Kobe Bryant, two players that have remained with the same team, it took them approximately four years to really ‘arrive.’ The other success stories?  The Jermaine O’Neal’s and the Tracy McGrady’s?  They are no longer with the teams that drafted them – in essence the original gamble lost, just like investors of Netscape did when the company had to sell itself in 1999 to survive.  Dig a little deeper and you’ve got your Taj McDavid’s, Korleone Young’s, Ellis Richardson’s, and the Leon Smith’s.  Never heard of them?  Those guys are the Pets.com’s and Dash.com’s.  If you forget those guys, history will be inclined to repeat itself.

Guess what?  As the number of high school entrants increases, so will the number of Kozmo.com’s until one day, someone is going to utter those fateful words, “these high school players suck!” and it will be all over.

Better sooner than later, for everyone’s sake.

…But then again, for every 10 Taj McDavid’s there is also one eBay…

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To see an image of the original post as it originally appeared, you can click here.