Just a couple of months ago I was in India. While having my shoes shined, Iheard the shoeshine boy say that he, and hundreds of other shoeshine boys inIndia, are compiling a database of all their customers. He explained how heis creating a website named Bootpolishboys.com that will contain thisdatabase, along with the customers' e-mail addresses. He also told me that alocal investment banker from Hindman Dachs had valued their enterprise inbillions, effectively increasing India's per capita income by $10 per year.This shoe polish boy was already dreaming of a castle, yachts, blondes and afleet of G-4's to shuttle him around the globe. After listening to him, Iknew there was something wrong with this whole Internet picture.Okay, enough fantasy, I'm just using my Indian fairy tale to help make amulti-billion dollar point.To get more serious, after I returned from India I looked at my portfolio ofInternet stocks. I had a stock called GlobalQuest, in which I had invested$100,000. It then became public and was worth millions of dollars, but Icould not sell the stock because of lock-ups. When I asked my venturecapitalist, he said not to worry. When the lock-ups expire, you can cash inyour stocks. That day came and went, but I still could not sell my stock. Myventure capitalist said that if we sell the stock, the prices will come waydown. When I asked him what I should do, he responded, "I don't know, hangon to your stock." After a while, GlobalQuest was sold to another portalcalled National Online, which bought GlobalQuest for a billion dollars inits own stock, valued at 50 times revenue. Shareholders were jumping up anddown with joy because that would give them more liquidity so they could sellthe stock in National Online and get their real cash in Yankee dollars.However, we can't sell the stock because it will take three months for thetransactions to go through, and now the value of GlobalQuest stock dependsupon the value of National Online stock. So here we sit and wait. Meanwhile,National Oneline has decided to buy another media company called Times JonesCorporation. Since the shareholders did not like the merger, the stock ofNational Oneline has dropped even further; however we can do nothing butwait and watch our va-lue in GlobalQuest keep coming down. But who am I tocomplain? My venture capitalist said that since I got in the game realearly, I would still make a lot of money when I sell the stock so long asthere are new buyers in the marketplace to buy National Online stock.When I analyse this, I find it to be like a pyramid valuation scheme. In apyramid scheme, the people who get in the game early make most of themoney.The people who come in last are left holding the bag and lose theirinvestment. There are the same similarities in Internet companies with hugeevaluations. There are a few Internet holding companies which have manyInternet investments, and they are called "keiretsu", a Japanese wordmeaning family. And they keep trading companies and stocks amongst eachother with funny money or, in other words "Internet valuation" stock. At thesame time, the public is so enamoured by these Internet funny moneyvaluations that some are pulling their money out of safe investments andcan't wait to invest in these go-go Internet funds. I asked a friend whoruns a multi-billion dollar mutual fund, about these Internet stocks. Hisreply was: "Ninety per cent of them will go to zero, but I have no choice.My investors want me to invest in the Internet. I have to follow their wish,otherwise I will not have a mutual fund to manage."My advice to these investors is, hang on to your value stocks like Coke, GE,Disney, IBM, with real revenue and real profits, and do not be mesmerised bythis whole pyramid valuation. When the dust settles, there will be a lot ofcompanies going broke and a lot of people who have lost a lot of money.I hope you all become Bootpolishboys.com billionaires. You can bet on it butdon't count on it.
