In Search of the Perfect Investment

Gloom 1: I ran YTD (year to date) charts of erstwhile hot stocks — Google, Apple, Netflix, Amazon, LuluLemon and Bidu. The worst was Google, down from $640 in January to $509 on Friday. Yuch.

Gloom 2: Nouriel Roubini says we have a “perfect storm” —  fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan. yuch.

Gloom 3: Most hedge funds are hurting. I see a lot owning Microsoft, Google, Apple, etc.

Gloom 4: In a lousy market everything drops. On Friday, industrials, tech stocks and gold fell. Yuch.

Happiness 1: James Altucher, who’s sold four companies, wrote a piece TechCrunch today:

The nine most important things to remember if you want to sell your startup.

Read it. It’s really good. Click here.

You don’t have to start or own an Internet company. They are, of course very popular (and very over-priced) at present. This is what the Economist wroteon the weekend:

Internet companies: Welcome to IPOville
Social-media firms see champagne; others see bubbles

INITIAL public offerings (IPOs) of internet start-ups are like buses: you wait ages for one to arrive, then several turn up at once. After years in the doldrums, the IPO market for technology firms has suddenly sprung to life again in America.

LinkedIn, a social network for professionals, kicked things off last month with a flotation on the New York Stock Exchange (NYSE) that valued it at $8.8 billion-572 times its profits last year-at the end of the first day of trading. Now a number of web outfits, including Groupon, which offers online coupons, and Pandora Media, an internet-radio firm, are queuing to join the party. Other start-ups could soon add themselves to the crowd, notably Zynga, the creator of addictive online games such as FarmVille, in which players grow turnips and breed pigs.

Web companies from China, Russia and elsewhere are also rushing to list on American exchanges. Shortly after LinkedIn’s stunning debut, which saw its share price more than double, Yandex, Russia’s largest search engine, floated its shares on the NYSE. Its price soared by more than 50% on the first day of trading. These first-day “pops”, as bankers call them, have stoked fears that a new internet bubble is inflating and reignited a furious debate about how best to value web start-ups.

Groupon’s potential price tag ($15 billion, by one estimate) is already controversial. Labelled “the fastest-growing company ever” by ardent fans, the firm has turned a simple concept into a money-spinner. Customers sign up to receive offers from local firms. Groupon spices up the process by, say, having some offers expire unless a certain minimum number of people subscribe to them. This prompts people to nag their friends to shop at the same boutique or eat at the same diner-hence the “group” in Groupon.

The firm typically keeps roughly half of the money that customers fork out, with the rest going to the businesses that actually supply the goods and services. Last year its revenues were $713m. In the first quarter of 2011 it took in a breathtaking $645m. Although Groupon is less than three years old, it operates in 43 countries and has no fewer than 83m subscribers.

The snag is that the company is still bleeding red ink. It lost $390m in 2010 and $103m in the first quarter of this year. Critics find this alarming. Groupon retorts that it is simply spending heavily to scoop up subscribers while the market it created is in its infancy. In its IPO prospectus, it urges investors to focus on other measures, such as free cashflow (operating cashflow minus capital expenditure), which was positive last year, and the arcane-sounding “adjusted consolidated segment operating income”, which excludes such things as cash spent on online marketing.

“The path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us,” writes Groupon’s boss, Andrew Mason, in a letter to potential stockholders. Not everyone is reassured.

How should one value a money-losing firm in a new industry? PwC, a consultancy, ranks web firms according to their “value per user”. This is calculated by dividing a start-up’s estimated worth (derived from venture-funding rounds, equity transactions on secondary markets and so on) by the number of its users.

By this benchmark, Groupon scores well, just below Facebook and Renren, a Chinese social network with a listing in America (see chart). But such measures do not reflect the risks of Groupon’s model. The company may boast 83m users, but only 16m have actually bought a Groupon. Its success outside America has been patchy: just 9% of its subscribers in London have ever bought anything from it.

Facebook enjoys a powerful network effect; Groupon, less so. It must spend a fortune to keep signing up new subscribers. Hence its keenness to steer investors towards a measure that excludes marketing costs. Groupon’s growth has attracted big competitors such as LivingSocial as well as a host of smaller start-ups. These rivals could poach its users with cheaper deals. And they could offer retailers better terms, too, in the process threatening Groupon’s fat margins.

All this shows why setting an offering price for shares in an IPO is so tricky. “It’s more an art than a science,” says Paul Bard of Renaissance Capital, an IPO research firm in America. Investment banks are supposed to be masters of that art. But some people, such as Peter Thiel, a big early investor in Facebook and LinkedIn, have accused the banks involved in the LinkedIn transaction of drastically underpricing the shares.

Bankers have sometimes been accused of underpricing deals so that their investment clients can make a swift killing on a firm’s shares. However in this case Mr Thiel’s gripe was that the banks failed to appreciate LinkedIn’s tremendous potential. Perhaps it never occurred to the bankers involved that people would pay so much for such a risky stock.

Yet there is something to be said for erring on the side of caution when setting initial offer prices. Elizabeth Demers, a professor at INSEAD, a business school near Paris, points out that what companies lose in terms of hard cash in the early days can often be made up for in terms of the publicity they get when the news media applaud the explosive rise in their share prices. They can also launch secondary issues of other shares at the new price established by the IPO. Unless, of course, this really is a bubble, and it bursts.

The big incentive to save. I have $59,987.78 in a money market fund with Goldman Sachs. For the month of May, Goldman paid me the grand sum of $5.47 interest.

Should I spend it all at once?

My friend, David Epstein, swears by this $100 Bluetooth cellphone headset. He has a custom-molded  earphone (another $50 or so) , which he likes because he’s on his cell phone 24/7. Click here.

The $6.50 lanyard is from Plantronics. He uses it to hang the headset around his neck when he’s not using it. He looks a little stupid with this thing around his neck. But he doesn’t lose his expensive headset.  Click here.

Apple’s $29  iPad Camera Connection Kit. These gadgets are how you get photos from your camera onto your iPad, which is a great way to show them.

The device on the left connects the USB cable from your camera. Turn your camera on and bingo the your iPad will show you the photos you have and ask you what you want done with them — added to your iPad’s Photos and/or deleted.

The gadget on the right takes an SD card, the most common digital camera memory card. I thought I could take the SD card out of my camera, pop it into this gadget and have the photos appear on my iPad. Sometimes it works. Mostly it doesn’t. The only reliable way is to connect your camera via cord to the USB gadget on the left. The gadget on the right is basically useless.

Sillier and sillier.
Representative Anthony D. Weiner planned to check himself into a treatment center after House Democratic leaders, including Nancy Pelosi, called on him to resign and suggested he needed psychiatric counseling.

A spokeswoman for Weiner said he would request a leave of absence from the House and seek treatment.

Congressman Weiner is seeking professional treatment to focus on becoming a better husband and healthier person,” said the spokeswoman.

I don’t make this stuff up. Sadly, we get the politicians we deserve.

Logic for today’s stockmarket.

The Master met a very old neighbor shuffling along with a cane in his hand.

“Good morning,” he called out. “And how are you these days?”

“Not well,” said the man in a feeble voice.

“I used to walk around the block every morning before breakfast. Now I feel so weak I can only get halfway and then have to turn around and come back.”

Harry Newton who says eat your heart out. The family now has a new dog, called Rosie:

She’s Havanese, is hypo-alergenic (hair, not fur–no shedding), is plane-friendly, weighs 6 lbs, is drop-dead cute, was born on March 23 and religiously uses her Wee-Wee Pad. Yes, there is such a thing.

Can you imagine being at  a posh cocktail party and being asked “What you do?”

“Why, I make Wee-Wee Pads.”

“It’s a good business?”

“Oh, yes, we benefit from every liquidity crisis. And there are, fortunately,  many.”