It's looking more and more like a classic bubble, although perhaps not
as severe as some of them in the past. Anyone fancy a tulip?
Investor Warren Buffet took a pasting for ignoring the 1999 surge in
dot.com stocks. Now he is enjoying the last laugh, as BBC News Online
North America business reporter David Schepp explains.
If investment guru and billionaire Warren Buffet had just one message
for investors following the bursting of the internet bubble, it could
be: "I told you so."
Mr Buffet, whose moves in the stock market are closely followed by
investors, noted in a letter to shareholders of his company, Berkshire
Hathaway, that technology investors have overstayed the party.
And, following in the footsteps of US central bank chairman Alan
Greenspan, Mr Buffet said that the "irrational exuberance" which
invaded stock markets in 1999 and early 2000 has left investors
expecting unrealistic returns.
Mr Buffet, who was widely chastised by analysts and in the press last
year for failing to cash in on the boom in technology stocks, cited
evidence from a Paine Webber-Gallup survey of investors conducted in
Dulled into complacency
Participants were asked their opinion about the annual returns
investors could expect to realise over the decade ahead.
They answered, on average, rises of 19%, to which Mr Buffet retorted
that there were not enough businesses in the country to ensure a
return of that magnitude.
Mr Buffet warned that the outsized returns experienced by technology
investors during 1998 and 1999 had dulled them into complacency.
"After a heady experience of that kind," he said, "normally sensible
people drift into behaviour akin to that of Cinderella at the ball.
"They know that overstaying the festivities... will eventually bring
on pumpkins and mice."
'Corporate chain letters'
Mr Buffet noted that investors had been hypnotised by the staggering
ascent of tech stocks and ignored everything else, including whether
the businesses they were investing in were making money.
Without naming them directly, Mr Buffet aimed some of his harshest
comments toward dot.coms, those internet-based businesses which issued
shares in widely anticipated floats only to shut up shop a few months
"Value is destroyed, not created, by any business that loses money
over its lifetime," Mr Buffet wrote.
He was referring to the business model all too many dot.coms employed
- to enrich investors through rising share prices rather than profits.
"The fact is that a bubble market has allowed the creation of bubble
companies, entities designed more with an eye to making money off
investors rather than for them."
Business models for these companies amounted to little more than "the
old-fashioned chain letter", he added.
It is advice that could be expected from someone who looks for
companies that are undervalued and promise long term profits growth.
Investors need only look at Berkshire's acquisitions in 2000 to get a
clear idea of what Mr Buffet & Co view as value stocks.
For example, Berkshire's purchase of MidAmerican Energy, in a year
that rewarded energy stocks as gas and oil prices surged in the US,
shows why investors envy Mr Buffet's investing prowess.
Berkshire also bought Cort Business Services, which rents furniture to
Mr Buffet said Cort had all the right ingredients for a purchase: "a
fine though unglamorous business, an outstanding manager and a
price... that made sense."
Other acquisitions in 2000 included US Liability, an insurance
company, boot and bricks maker Justin Industries, carpeting
manufacturer Shaw Industries, Benjamin Moore Paint and Johns Manville,
an insulation and roofing-products maker.
There was not a technology stock in the bunch.
-- f.a.n.finch firstname.lastname@example.org email@example.com MALIN: VARIABLE 2 OR 3 BECOMING NORTHEASTERLY 4 OR 5. SHOWERS. GOOD.
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