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Inside Wall Street Two Arrows

by WealthEffect Staff


The Internet represents a refined business model
  It does not, however, redefine business  
  It certainly does not reinvent investing  

The Internet is the real deal: it offers a better way for buyers and sellers to get together. Greater efficiency of distribution is no small achievement.

The Internet will also redistribute wealth. A new set of winners and losers will be created, both within and outside the web. The Internet has not redefined business — we're still driven by revenues and costs — but it offers an opportunity to bring more to the bottom line over time (which might seem ironic since most e-businesses are proud to lose small fortunes each month).

Alan Greenspan, Chairman of the Federal Reserve, likened the Internet craze to a lottery, which will produce a few big winners and a slew of losers. The current battle among websites is for market share, critical mass, and economies of scale. But victory in the war will be measured in profits.


The frenzy in the stock market reflects both rational hope and irrational greed — hope to own a piece of a future leader in a significant new industry; greed to ride a wave of easy gains in a market seemingly blind to the rules of valuation.

Valuation, however, will win out. As Benjamin Graham pointed out decades ago, the market is a voting machine in the short run, but a weighing machine over time. The problem is not that all Internet stocks are wildly overvalued, but that it's too early in their lifecycles to put a reasonable value on them. Warren Buffett suggested that each business school should have a final exam with one problem to solve: Value an Internet business. His conclusion: "Anyone who comes up with an answer, fails."

As time goes on, there will be some massacres in the Internet sector and some opportunities. Some of the players have extraordinary business models; the day will come when their prospects are clearer and their popularity is a distant memory. We look forward to that day.

For now, we are thrilled by the potential of the Internet and concerned about its impact on individuals. The explosion of "day trading" through on-line brokers, particularly on Internet stocks, doesn't promise to have a happy ending. There is an old story of a sardine trader who opened a can and found only sand inside. "Don't worry," he was assured. "That can is only for trading."

The stock market is a great place for investors; historically, it hasn't been so kind to traders, especially amateurs. At the end of the day, you still want to own shares of a great company's future, where time is on your side. No question, there is now an easier, cheaper and quicker way to trade stocks, but having a racetrack built close to your home doesn't make it a better bet.

To see the Amex Internet Index chart, click here.

Suggestion: Go to Intel: The Strong Get Stronger