Reflections on Investing Ten Years Ago

Yesterday I happened to be rummaging through some old files and came across my 1997 tax return. Fortunately, this had nothing to do with any communications with the IRS, but it got me to thinking about how my investing ‘evolution’ has three distinct long-term phases. Specifically, for the first ten years of my investment life, I dabbled in equities with mixed results at best, in much the same manner as Nicholas Darvas describes his early floundering in How I made $2,000,000 in the Stock Market.

Deciding that the time and effort was not worth the lackluster results, I pushed my savings into mutual funds for the next five years or so, again with fair to middling results. I got a little ornery and started chasing momentum funds like those from PBHG and Van Wagoner, but ultimately concluded that it might be possible for me to try to mimic what they were doing by buying individual stocks on my own.

[As a side note, Gary Pilgrim (PBHG) and Garrett Van Wagoner ended up having more than their share of difficulties, but their approach inspired me to aim higher than beating the S&P 500 by 1.0% point each year.]

To make a long story short(er), the third phase began in 1997 when I decided to go ‘all in’ on a portfolio consisting entirely of internet stocks. While that may not sound all that surprising with the benefit of hindsight, very few investors were buying any internet stocks at the time and frankly there were not that many choices out there. I reasoned (and yes there was some hope involved too) that if most of the technology changes that were being touted at the time came to fruition, it could be a once in a lifetime investment opportunity.

So…I made the type of decision in 1997 that many others would make in 1999 and early 2000. What happened?

In retrospect, I might have done better plowing my money into the Munder NetNet fund (now the Munder Internet fund), but instead, I picked five small and very speculative companies that I thought had a chance to be big home runs if things went my way. The first two companies I started buying up were content plays. If content was going to be king, I wanted to own the king makers. Both of my selections are still alive and kicking: BroadVision (BVSN) had a meteoric rise and then crashed back to earth, Icarus-style; Open Text (OTEX) has led a comparatively uneventful existence, growing slowly and steadily to its current $1.3 billion market cap. My third choice was CyberCash. I expected that someone like PayPal would eventually dominate the electronic payment business with the type of ‘increasing returns to scale’ (described by Brian Arthur, among others) as the industry standard, but alas it was not to be CyberCash, which eventually declared bankruptcy, had its assets sold to VeriSign, with the CyberCash intellectual property eventually ending up at PayPal via an acquisition. In the VoIP communications space, I bought VocalTec, a company that released what I believe was the first internet VoIP program. Now a $16 million also ran (still listed as VOCL, for the record), they even had something called – of all things – the IPhone out back in 1995. Sometimes you can recognize the pioneers by the arrows sticking out of their back... For whatever reason, I felt most confident in the fifth ‘internet stock’ I started buying. Check Point (CHKP) has been a leader in firewall and related security products in the ten years since I first started buying the stock. An Israeli company like VocalTec (for the record, Open Text is Canadian; BVSN was the only Silicon Valley company, as CYCH was headquartered in the Virginia suburbs, just outside of Washington D.C.), Check Point has grown to become a $5.4 billion company, but has always operated in the long shadow of a strong Cisco competitive threat, with this 1998 Check Point press release typical of that battle that has been fought.

So enough of the nostalgia. For those who may be interested, I did hold BVSN all the way to the 2000 top – and then some of the way down. I was out of the other four within a year. In retrospect, CHKP and OTEX turned out to be solid if unspectacular investments; CYCH and VOCL were the two dogs.

I’m not sure exactly what the lesson is here, if any. In 1998 I went on to pick a lot of winners in the internet space – and a lot of dogs. I have always been patient enough to let my winners run, but over the years I have continued to improve my ability to cut my losses quickly and protect my profits for those trades that make a big U-turn. If I had been fortunate enough to have read the likes of When to Sell, written by Justin Mamis in 1977, and It’s When You Sell that Counts, a 1991 classic from Donald Cassidy, I’m sure those early internet years would have been considerably more profitable. In the long run, each individual learning curve has different hurdles and a different timetable. The trick is to get a little smarter every day, even if your portfolio does not always reflect all newly acquired wisdom.

Party Like It’s 1996?!?

Time for an informal poll again. Raise your hand if you keep track of VIX SMAs going back more than 20 days. What about SMAs going back 1000 days? You may think I’m crazy (sometimes I like to pretend to be crazy just to be a little more provocative, so consider the possibility that I’ve merely intentionally unhinged my brain for awhile,) but if you put any credence in the idea of VIX macro cycles and think it is possible for VIX cycles to last 2-4 years, why not look at the VIX’s long-term moving averages?

When thinking about the current investment environment and the year it most closely resembles, one year I do not recall any reference to is 1996. Look at the chart below and consider that 1996 was not a bad time to initiate an aggressive buy and hold strategy. Do you remember what Yahoo looked like in 1996? No, not the stock (which opened at a split-adjusted 1.05 in April and could be had for 0.64 in July), but the 1996 Yahoo web site.

Continuing the wayback machine theme, coming tomorrow: what I was buying in 1997 and why I was buying it.

From Futures to Pastures (an “and More” selection)

All this talk about futures must have conjured up Newton’s Third Law of Brainstorming: whenever I focus my thoughts on a particular future time period, the future simultaneously exerts a force on me with the same magnitude in the opposite direction.

The result is today’s chronological oddity in which I use this space to pull from my personal archives some of the computer hardware and software that still generate nostalgic smiles more than 15 years after I first used them. All examples date (I believe) from before the 1992 launch of Windows 3.1 that essentially ended the DOS/keyboard era of personal computing.

In no particular order…

Stacker (Stac Electronics) – disk compression technology that turned a 10 MB hard drive into a 20 MB one. Stac was one of many innovative small software companies that Microsoft out-marketed and eventually made irrelevant via operating system bloat. Bonus points if you have ever heard of Squish Disk or used it to stretch the capacity of 720k floppies.

(the original) Norton Utilities – the best tool available for recovering from a nasty crash, with tech support that would help you regardless of whether you owned their product, just for the pure joy of solving your problems and getting you up and running. Hard to imagine in the current environment… Key components were Unerase and Disk Doctor

QEMM (Quarterdeck Extended Memory Manager) – after you discovered, like Bill Gates did (or did he?) that not only was 640k not enough, but you were lucky if you could use 512k of that RAM, every k mattered

Toshiba T1000 laptop – this was my first computer and my first laptop. Actually, it was the first laptop. Twenty years later I have owned approximately 25 laptops and zero (count ‘em) desktops. Despite the 768k RAM disk, this was so technologically backward, even for its time, that it forced you to learn all sorts of innovative workarounds. Fortunately, very limited technology is a great way to develop and sharpen a techie brain…

DOS 3.1 – the first DOS that led me to believe that there would someday be a workable and powerful operating system. Little did I know how long the wait would be…and perhaps it is still ongoing. (DR-DOS was better, but it was DOA)

LapLink – the first speedy way to transfer information between computers, as long as you didn’t mind trying to keep track of those damn cables…

WinFax – a great late night savior that allowed me to fax documents from my room to the hotel’s fax machine when late night (or sometimes mid-day) printing was not yet an option…

Quattro Pro – much better than then-dominant Lotus 1-2-3, with unmatched graphics, tabbed worksheets, and many other features that were way ahead of their time

SimCity – a glimpse at the future of gaming, with the odd idea that there was nothing to win, but everything to create

Telix 3.15 – once you crossed over to the world of BBSes, you pretty much had a virtual internet all to yourself, with the exception of a bunch of other pioneering souls. Telix facilitated those modem to modem communications – which were definitely not as easy as trying to find a modern day hot spot.

Z-modem – a radical idea at the time, a file transfer protocol that actually allowed you to restart your dial-up file transfer from the point where it left off. Important in the era of frequent dropped connections.

Silly Little Mail Reader (a.k.a. SLMR or Slimer) – no piece of software has ever induced the quantum leap in internet enjoyment as did this offline mail reader
This tagline stolen by Silly Little Mail Reader!

Practical Peripherals Pocket Modem – the first cigarette box-sized modem had no lights or audible indicators, but you could travel with it and surf up to 2400 bps back in the day, about 1/22 the speed of current dial-up technology… I love the comment from the 1991 New York Times review: “…plenty of speed for all but huge amounts of data…”

Relay Net International Mail Exchange – imagine something not too far from an open source telephone-based internet, where phones called each other in the middle of the night and swapped BBS messages – long before the DARPA version of the internet was made available to the public

“Let’s see if you bastards can do 90!”

About a month ago, I remarked on some comments from Doug Kass about how the markets looked a lot like 1994, which was a decidedly down year for equities. Now Bernie Schaeffer tells us that the WABAC machine (not to be confused with the highly entertaining internet archives ‘wayback machine’) should actually be set to 1995, not 1994.

The difference, of course, is substantial. In 1995, we saw the beginning of a glorious bull run that lasted through until early 2000. Those who loaded up on long positions in 1994 probably had a substantial hole to dig out of before they could enjoy the fruits of the 1995 bull – if they didn’t give up entirely in the interim.

In “Market Parallels with 1995,” Schaeffer makes the case for parallels with the beginning of the 1995 bull as follows:

“Joseph Keating, chief investment strategist at First American Asset Management, recently pointed out in an article that the SPX's price-to-earnings (P/E) ratio fell to 17 as of the third quarter of 2006 - lowest since mid-1995. Meanwhile, the SPX has now gone 221 days without a two-percent correction. This compares to the 223-day streak experienced in 1995.

Furthermore, we find the market in another in a low-volatility environment, as the CBOE Market Volatility Index (VXO) currently hovers around levels similar to those we saw in 1995. “

Personally, I think it looks more like 2017 than anything else. If forced to choose to match my outlook with one year over the other, I’d pick 1994 over 1995, but what do I know, I’m just living in my own little VIX-centric universe…