Investing – The Good News – The Longtail of Investing

Someone rightfully pointed out in the comments that I had been sounding a little sour in my last couple posts regarding investments. Very true.

The stock market is one of those hot buttons for me. Fairly valued stocks ? Fairly valued by who ? PEs ? Why have they expanded ? Why was Intel a 10 PE cyclical stock in the early 1990s, pre digital technology boom, and now when it has to remake itself, its PE is 20x ? Can you say marketing ? Can you say cash has to go somewhere ? Take away the PE expansion and Intel is one of many, many companies that would be trading at the same levels they were more than 10years ago. And Im not picking on Intel. Its a great company.

The reality is that there is so much money chasing stocks today, fair value is only fair when you can find someone else who thinks its value should be a little bit fairer . Which is another way of saying that public companies are the meat of the bellcurve and private companies, particularly recent startups are the longtail and where the opportunity is.

Let me repeat myself one more time on another topic. The best investment you can always make is in yourself. If you want to secure your financial future, invest in your own knowledge. 29 dollars for a book is going to be a better investment than 29 dollars in commission to a brokerage 99 out of a 100 times. Being the best at something you love to do, is going to bring rewards, financial and otherwise that will far exceed what any stock or bond can offer you.

It took me 18 years of failure and success to go from being a little bit lucky (Someday I will write the blogpost about how people in the PC/Lan reseller industry used to give me a hard time about how I got lucky selling MicroSolutions at just the right time.:), to a little more lucky (trading technology stocksagainst the uninformed), to a lot lucky (the broadcast.com IPO , then sale), then even luckier still (collaring my stock), to even luckier still again (not trying any of the “tax savings options all the brokerage firms were trying to sell me, that would now be costing me hundreds of millions of dollars in penalties), to more lucky, starting HDNet at the right time and partnering with amazing people.

But I digress.I hope to get lucky again. I think we are in the middle, not the beginning, the middle, of a very unique time period. One unlike anything we have seen since the early 1980s.

Back in the early 1980s when I started MicroSolutions, the only computer literate people were those who worked on big computer platforms. IBM 36s, DEC, Data General, HP mainframe and minicomputers. There were few people who had much expertise in writing software for, orworking on personalcomputers. Fewer still that focused on connecting multiple PCs together into local and wide networks.

That was a unique time because the amount of money it took to get in the business was the cost of buying a personal computer and the time to learn what to do with it. For $5k, an IBM XT and copies of a basic interpreter, compiler and application software like DbaseII was yours to start your own company with. And for those of us who couldnt afford to buy them, we borrowed them🙂

Back then, the meat of the business bellcurve was in proprietary applications. Every mini or mainframe had appsthat were exclusive to it. The long tail opportunity was inusing the new development tools to create custom, PC based apps that provided businesses with new productivity and profitability opportunitiesthat hadnt existed before.

Today, a comparable environment exists. Computers with power and storage unheard of just a few years ago, are available for under 1k dollars. Heck , under 500 dollars. Has anyone noticed that we have been stuck on 3.xghz speed equivalency from CPUs in PCs for going on 2 years now ? Prices come down, cpu speed has stabilized, storage and memory and specialized processors keep on expanding. Its amazing the things people can do with a PC/Mac these days and the price points they can do it at.

Which has created a boom of individuals developing web based interfaces and applications. Some like to call this Web 2.0. Others are calling it the AJAX boom. Buzzwords and new development frameworks are coming at us faster than we can think of them all. Ruby on Rails, Mashups, RSS, WML, Flash 8 and tons more. The great thing about all of these is that all it takes is one or two smart people on a computer to put them together. Have a great idea on a new user interface or application ? For under 500 bucks, and 10 bucks a month to a hosting service, you can be up and running and taking on Google.

Thats where my investing focus has been. The “long tail” of innovation. Thats how cool and up and coming companies like Goowy.com, icerocket.com, box.net, redswoosh.net, filesanywhere.com among others have caught my interest and potentially my investment dollars.

Check out their sites. These are people who invested in themselves, and have growing companies to show for it. The exciting part is that they are just a few of the thousands that are coming up with unique ideas. Somewhere out there are Google and MicroSoft competitors.

Im not suggesting that you run out and find friends starting companies and give them your money instead of putting it in the market. Or that you run out and start one yourself. What I am saying is that the biggest upside today is not in the stockmarket. Its not in seeing where PEs expand or contract to. Or watching to see how the market treats splitting up Viacom.The real money and upside is in the investment longtail and people investing in themselves.

All I am saying is that for me, someone who is fairly well versed in technology, this is an amazing time to invest. I may hate the market, but I love what is going on in the long tail of technology and innovation. The future is bright for some of these companies, and in reality, we may be finally seeing a return to the Peter Lynch mentality of investing in companies whose products you like and use. The difference is that it isnt coffee or something you see in the store. Its something you use yourself on your PC, PDA or Phone. The challenge, and what makes it fun, is that these are private companies.

Where there is change, there is opportunity.

61 thoughts on “Investing – The Good News – The Longtail of Investing

  1. hello….

    Join Emerging Growth Alert Newsletter !

    By joining the team at Emerging Growth Alert you will be in position to receive stock alerts profiling stocks about to move or already in motion. Our alerts are sent in time for you to research, investigate and make a decision about whether this opportunity is right for you.

    http://cashstocks.angelfire.com

    P.S.
    You may think this is spam but this is only an invitation for those interested to receive Stocks alert ONLY stock alerts… Thanks to those who subscribed🙂

    Comment by stocksshock -

  2. This is no joke or scam…you can get a MacBook Pro, and more for FREE!!!

    All you have to do is copy this link

    http://freemacbookpro.com/index.php?referral=648857

    and go to the site.

    Once you\’re their you just sign up for one of the offers, refer 20 people, and the product is yours! I signed up for the Netflix 2 Week Free Trial but they also have other offers like Blockbuster, GamyFly, Discover Card, Free Credit Report, and more. You have nothing to lose! I didn\’t spent any money and I am in the process of getting the MacBook Pro. So just sign up…refer 20 people…and they ship what you want for FREE. If you have any questions just let me know and I will help you out.
    Good Luck!

    Comment by carl -

  3. What should P/E’s matter? Why should it matter if a company is trading 100x this years earnings if its trading at 10x next years?

    Comment by barry -

  4. Ok, I had to read that one twice. The keyword was longtails.

    The difficulty is sometimes figuring out what one is interested in
    and good at. I guess some people have to ask that question over and over. Sometimes you have to keep asking the question. That is what bugs me about life. So many people know by the time they are 5 what they are good at. A generalist has a problem with this question. Time for me to hit the bookstore, I guess.

    It will be interesting to see what “Lucky” thing next happens for you.

    Comment by Haake -

  5. No one is that Lucky!

    My favorite definition of luck is: “Where preparation meets opportunity.”

    That’s making your own luck, and you have done that as well as anyone!

    Comment by Barry Ritholtz -

  6. Mark, I have been reading your site for about 2 weeks now and find it facinating. My wheels have been turning since then.
    I just wanted to ask how is it that some of these sites pop onto your radar screen? Is it knowing the business or is it people putting it in front of you being who you are? I had never heard of Goowy.com, icerocket.com, box.net, redswoosh.net, filesanywhere.com until your site, so I guess I am the dumb guy at the table.
    How do you know what you are looking for when you don’t know what it actually is you are looking for?

    Comment by Chris Monahan -

  7. Mark, this is great commentary…PLEASE keep up the posts!

    Comment by Marc -

  8. Mark,
    Sounds like our site fits your profile. Do you still hate podcasts? lets be friends.
    Andrew
    Coffey
    http://www.streetiq.com

    Comment by Andrew Coffey -

  9. I am still and have developed trading Methods(not software) for a major player in the financial buisness along with my trading as we discussed before .

    Comment by runescape money -

  10. For you to sell the stock at a profit, you need to find someone who believes there is still a lot of growth left, and is willing to let that belief get priced into the stock at that point in time.

    Comment by wow powerleveling -

  11. I agree, invest in your own knowledge. After taking some bad advice from a stockbroker one time, I overheard some brokers in an elevator, unrelated to me, say, “Man, it crashed. Oh well, it’s not my money.” Felt like deckin’ em’.

    Comment by pos -

  12. Whats the point of having knowledge if you dont do anything with it. Yes learn, read books, advance your understanding, but alas you must do something with it. Invest money too!

    Comment by FSBO Realtor -

  13. The Stock Markets can be a harsh place, but if your time horizons are longer term – you quench the risk factor.

    When you trade in the shorter term – your risks are much greater, and so are the possible returns – if you know how to manage the risk carefully.

    Comment by Share Trading -

  14. Hello People!

    I own a franchise business that I was thinking about selling so I meet with a company that sells small business. These businesses are going for 2-5 times net. That is a p/e ratio of 2-5. Maybe a good place to find an investment opp. Like Mark is saying at least you are in the drivers seat on this one.

    Comment by buy paroxetine -

  15. Hope you don’t think me too stupid for not knowing your involvement in the HD Net project.

    Comment by whales -

  16. Intel is not trading where it was 10 years ago, but it is about where it was 9 years ago. The PE is closer to 14 than 20. I agree with the theme and that there are a lot of stocks where this applies, but disagree that Intel is one of them.

    Comment by Michael -

  17. very goooooood!!!

    Comment by aaabbb -

  18. very goooooood!!!

    Comment by aaabbb -

  19. very goooooood!!!

    Comment by aaabbb -

  20. very goooooood!!!

    Comment by aaabbb -

  21. it’ok!

    Comment by IT中国 -

  22. happy now you!!

    Comment by qq -

  23. Hello mark,
    Not pitching a crazy theme to you, but i run a webhosting company and want to see if we can talk at anytime about this business as its a major part of the internet future growing at rapid speeds. Please email me if you have any interest. Thank you nathan

    Comment by nathan oulman -

  24. Mark:

    I invested in myself & created BlogEverywhere at http://www.blogeverywhere.com It is a service that lets users add comments to any web page as they surf – without leaving the page. I’m wondering what you think about it?

    shiraz

    Comment by Shiraz -

  25. The value of an investment is just the discounted value of the future stream of cash that can be gained from it. Doesn’t matter if it’s a public company or a private company, your own business or someone elses. Of course if it’s a public company you have to worry about the CEO diverting that cash stream into his pocket, but the same principle applies. It’s the principle that’s driven every single one of Buffett’s decisions.

    It’s usually great advice to tell people to invest in themselves. But if the return on that investment isn’t as great as other options, they should reconsider.

    Comment by Randy Hill -

  26. Mark,

    Hope you don’t think me too stupid for not knowing your involvement in the HD Net project.

    It’s funny how something so big could have the upper echelon of people involved so hidden.
    But hey, some people don’t know who the President is so I don’t feel that bad.
    And the one’s that do know him thinks he’s screwing up.
    Well maybe you don’t. As I understand it, he does alot for Billionare’s and things like that. I don’t know.

    Anyway, I look forward to reading past articles and future comments and input from someone that has gone where some of us are trying to go…

    bD

    Comment by blain Daily -

  27. Mark,

    Hope you don’t think me too stupid for not knowing your involvement in the HD Net project.

    It’s funny how something so big could have the upper echelon of people involved so hidden.
    But hey, some people don’t know who the President is so I don’t feel that bad.
    And the one’s that do know him thinks he’s screwing up.
    Well maybe you don’t. As I understand it, he does alot for Billionare’s and things like that. I don’t know.

    Anyway, I look forward to reading past articles and future comments and input from someone that has gone where some of us are trying to go…

    bD

    Comment by blain Daily -

  28. Mark,

    I just finished reading this post twice.

    Will you consider starting a new blog just for those of us who are investing in our own startups? Any insight you provide can have a great impact. Even if you think you’re rambling on (or if others do) there’s plenty of substance to your message and your advice may save some of us time, money and help us avoid making any mistakes you may have made in the past.

    Knowledge is priceless whether or not the person sharing thinks so.

    Maybe you can even allow startups to get advice from you in exchange for a small equity stake.🙂 I know I’d be willing to give you a stake for your knowledge & guidance.

    Comment by Mr. Rhee -

  29. I enjoyed hearing your views on the stock market also. For me, I still believe in stock investing but I think your words of caution should be taken into consideration. My principles is to only by solid companies that are not too risky. As a Canadian, I also look for strong dividend paying companies, specifically from “income trusts” that allow investors to receive often monthly distributions. I agree with you that bonds are important to hold and should be essential to be at least part of everyone’s portfolio.

    Your comments have also made me think about further “business ideas” I can work on outside of my “employee” job. I enjoy writing so I’m considering putting a book together on a topic that I’m interested in – maybe that can provide some extra income.

    Comment by Dan Hodgson -

  30. Great post Mark. The times are certainly changing and we must recognize the power of the individual

    Comment by Bangalore -

  31. Mark, you are nothing but a hypocrit, you tell people not to invest while you made millions? Good luck with your shorts you heaping pile of horseshit.

    Comment by Wemblee -

  32. You had mentioned Goowy.com, icerocket.com, box.net, redswoosh.net, filesanywhere.com and HDNet

    I feel that HD Net and icerocket.com are great investments because you have a head start on other businesses and they are innovative ideas.

    However, I am not sure about the others primarily bacause they do not seem to have the innovative edge:

    redswoosh.net seems to borrow heavily from akamai which is an established player is delivering content
    box.net, filesanywhere and Goowy seem to be storehouses of various types of information which are “accessible from anywhere” because they are on the net – you will soon have competition from “mom and pop” estabilshments on the internet.

    Comment by David -

  33. All of these posts regarding the stock market, and you never remind the reader of your financial incentives? You want people to stay out of the market so you can make money on your shorts.

    Comment by ken -

  34. Your post struck a chord with me. I just registered for a real estate sales agent class. It’s something to do between now and when I hopefully enter law school- I’m on my eighth draft of my personal statement for law school admissions. I’m a firm believer in investing in oneself. I’m not a real estate fanatic- I just bought my first house (and I’m freaking out about the prospect of not being able to pay my mortgage) and in the househunting process, I realized that there are a bunch of people out there doing a really bad job at putting people in the houses they want. Maybe, just maybe, after a two-month course, I’ll be better equipped to help some people with that sort of thing, since I believe I’m not a completely self-serving moron. Apparently, there are a lot of those, and it ain’t pretty.
    Incidentally, I could continue to languish at my corporate gig, unfullfilled, stagnant, and waiting to die.
    An investment in one’s personal education, formal or otherwise, can only better equip a person to communicate, and participate, with society. If someone isn’t a complete sociopath, maybe they can make some sort of positive contribution.
    Mark, you have some good stuff to say. Keep it up- and spell check it now and then. I’m silly like that.

    Comment by KR -

  35. You said “Being the best at something you love to do, is going to bring rewards, financial and otherwise that will far exceed what any stock or bond can offer you” which is just a hypocritical and egotistical statement.

    It is the other way around. All those who have by any means succeeded in any endeavor always claim that they did so because they were the best, unless of course if they get caught one day when all they have to do is to ask for forgiveness. I don’t have to name any examples.

    For every person who succeeds there are many more who just get to be close second best but could just as well have been the best. That is the nature of competition and essence of Darwinism.

    Yes, most people are suckers and greedy by nature and some people are able to take advantage of this universal truth.

    Why else would a person who can simply throw a ball in a hoop be a source to get millions of $ for his promoters from the stupid onlookers?

    Why would so many people believe in afterlife and heaven when there is no evidence of that and grease the palms of the church leaders and self proclaimed messiahs?

    Comment by Sunrise -

  36. Investing is always a good thing as long as you sell in the future and use the profit for something. Some people will just invest and keep it for a lifetime without enjoying the appreciation. I do not understand that at all.

    Comment by Email Hosting -

  37. The part about investing in yourself is key. Don’t pay others for their knowledge, pay yourself, invest in yourself, and you will be happy.

    OT: Can the Pistons win 70 games this season and should they?

    Well the Lions have not been winning.
    Can the Pistons win 70 games this season? If so, should they try to win 70 games?

    I posted this here:
    http://sports.crimsonlight.com/2006/01/can-detroit-pistons-win-70-games/

    Comment by JLTX -

  38. Answering Barry (#6): If the P/E is now 100 it means the expected growth has already been priced into the stock by the market. For you to make money, you need the P/E to stay up while E grows. For you to sell the stock at a profit, you need to find someone who believes there is still a lot of growth left, and is willing to let that belief get priced into the stock at that point in time.

    Buffett, and his mentor Ben Graham, both advocate buying fundamentally good companies at a bargain. That makes much more sense to me than buying at a premium hoping there’s still room for the price to get bid up.

    From what I can tell, there aren’t many bargains out there right now.

    Comment by Paul Lambert -

  39. Mark:

    I completely agree with you on this topic. A lot of the money that has poured into the market over the past decade or so has been from 401(k) and IRA accounts. Basic microeconomics teaches us that when you have that kind of demand, prices will get bid up, and that’s exactly what has happened. While I don’t think it’s quite true that every transaction has precisely one sucker (e.g. is that the way you would characterize your Yahoo deal?), I do agree with the “greater fool theory.” In other words, both parties were suckers!

    And you’re right that some day those folks loading their retirement accounts with equities are going to need to start cashing out, sooner rather than later if Social Security really gets strained. Then it will be sellers looking for buyers. We’ll be very lucky if a serious depression is not in the picture. I’m not completely out of the equity market, but the bulk is in CDs, muni bonds and Treasuries. It was that way before the .bomb and will remain that way as long as things stay crazy.

    PL
    CompuServe alum (1973-2000)

    Comment by Paul Lambert -

  40. Mark…

    Not sure if you saw this, the guys over at the “Fool”, made some recent comments about your latest posts here.

    http://www.fool.com/news/commentary/2006/commentary06010604.htm?source=eptyholnk303100&logvisit=y&npu=y

    Rob

    Comment by Rob -

  41. I’m sorry I agree with a lot of your sentiments about being the best you can be.

    But the thing about luck I do question because chance is 50-50. Call me an aweshucks bumpkin but I think it has to be more than that maybe a little divine intervention.

    Comment by Nobody -

  42. Great post Mark. The times are certainly changing and we must recognize the power of the individual.

    Comment by Sean Attwood -

  43. Another great post, Mark. I’d your opinion on something — “Is business a zero-sum game?”

    Comment by Jason -

  44. Yo Travis Reeder up above post#16 I went to that site…I dont get it. It seems incompleate or broken. Anyway my 2 cents I looked

    Andrew Coffey
    http://www.streetiq.com

    Comment by Andrew Coffey -

  45. In your opinion what company has the most upside ?

    Goowy.com, icerocket.com, box.net, redswoosh.net, filesanywhere.com

    Comment by Brian McCafferty -

  46. I am not sure how the small investor can get involved in a company like these. How can the little guy get involved? sounds great if i have a billion and some influence…

    Comment by Will Gro -

  47. Mark, Hello Again, Blog is excellent.

    Your comments regarding the stock market are right on . I have traded it for about 25yrs.I’m 52 yrs old now. That market is made to trade. I also agree with the investment in self whole heartedly.

    I am still and have developed trading Methods(not software) for a major player in the financial buisness along with my trading as we discussed before .

    We only differ on your and JIM -the -CRAMMMMERS style.lol….. Regarding fundamentals, most don’t have the inside information to new tech companies like you do.A few of us ((100thousands))use Technical Analysis which *some*can be BETTER…

    Less than a handful of us use T/A of fundamentals per sector/industry to capture great early entrys /exits long before fundamentalists or regular T/A’s..

    Still Proving Mr. Fractal Mandelbrot and fundamentalists are only half right every DAILY.😉

    Thanks again for your comments R.D.
    R.D.

    Comment by Ron D -

  48. I’m there for ya😉 I was wondering if you had taken a bad turn in life. Did you delete my post? I can’t find my comment on the last post.

    Comment by Taylor -

  49. For everyone who hasn’t heard of the companies Mark is talking about try techcrunch.com to keep informed.

    Comment by Josh -

  50. http://www.andersenalumni.net

    The above site is an interesting start-up. It might be able to use an angel at some point – not sure.

    Comment by nate -

  51. Any thoughts on USA Technologies? (at Yahoo Finance, the symbol is USTT.OB — it is a penny stock) The underlying idea is wireless technology for vending, and other stand-alone machines that generate revenue (eg, washing machines)

    Comment by nate -

  52. Great post. Interesting comparison of investing in yourself vs the market, good way to look at it. As for my myself, I like to learn by doing, so I came up with a quasi mashup/search at http://www.rel8r.com to learn about the latest “web 2.0” technologies.

    Comment by Travis Reeder -

  53. man, you’re really long winded. Maybe you speak fast and it turns out to a three page essay once you’re done

    Comment by Champ -

  54. Dear Mark,

    I have a company that uses Ajax to clean sinks and Ruby on Rails does the cleaning. (Ruby comes to work by train, hence the name “Ruby on Rails”). We have a bona fide brown recluse spider that does our web serving and he, Spidey, is not impressed with Web 2.0 since he is up to Web 3008 by now. We have been doing social networking far longer than anyone else on the web, in fact some of our employees ancestors invented fire and hung out in caves getting drunk on fermented bat guano.

    Do you think we are a prime investment candidate? (Sorry, I couldn’t resist the “buzzword mashup”🙂 ).

    Comment by Robert Oschler -

  55. Great insight indeed. There is so much opportunity staring us in the face. Everything from the mind blowing and potentially life changing capabilities of Nanotubes and FOLEDs to simple ideas like the http://www.milliondollarhomeage.com and http://www.decisionsin.com. Us peons just need to be taught how to tap into it. Hey, there’s a business idea!

    Comment by G Money -

  56. I like most everything you have to write on investing. Keep writing!

    Comment by nate -

  57. I own a franchise business that I was thinking about selling so I meet with a company that sells small business. These businesses are going for 2-5 times net. That is a p/e ratio of 2-5. Maybe a good place to find an investment opp. Like Mark is saying at least you are in the drivers seat on this one.

    Comment by ryan -

  58. Thanks for all your insight. I too wonder how you find out about companies like Icerocket and Goowy. I am a software sales rep and involved in the high tech/internet world but never heard of these companies before you introduced them. Thanks for the inspiration…Do you need an APPRENTICE?! Ha Ha Kurt Frisco, TX

    Comment by Kurt LaCroix -

  59. Mark,

    I have heard various stories about how you collared your Yahoo stock by both buying and selling puts and calls, but also that you shorted indices that included Yahoo. I am curious if you would explain how you actually did it. Why did you also short the indices (which would not be a perfect hedge)? Was that because there were not enough puts and calls available to hedge your entire Yahoo position? Did you use the collar and shorting to protect your stock value until you were no longer locked in and then did you sell your Yahoo position as soon as you were no longer locked in?

    Thanks

    Comment by Noel Nadur -

  60. Mark,

    I have heard various stories about how you collared your Yahoo stock by both buying and selling puts and calls, but also that you shorted indices that included Yahoo. I am curious if you would explain how you actually did it. Why did you also short the indices (which would not be a perfect hedge)? Was that because there were not enough puts and calls available to hedge your entire Yahoo position? Did you use the collar and shorting to protect your stock value until you were no longer locked in and then did you sell your Yahoo position as soon as you were no longer locked in?

    Thanks

    Comment by Noel Nadur -

  61. I just wrote a blog The Next Big Thing in 2006 which lists the start-ups that I think will hit it big in the next year or so. The common thread is communication and connection. User generated content is huge. BrightCove is one of the companies I am following. They will disrupt the video content market in a way that Broadcast.com could have if they stayed with it. See this link for the full story.
    http://dondodge.typepad.com/the_next_big_thing/2006/01/the_next_big_th.html

    Comment by Don Dodge -

Comments are closed.