- How difficult was it to maintain a disciplined investment approach when so many dotcom stocks were surging, despite having zero revenues or profits?
The challenge for fund managers was that inflated valuations drove many tech and media into a big share of benchmark indices. The rotation out of these stocks began in January 2000. “Real economy” stocks, such as banks, began to recover, as the smart money began leaving the dotcom table. However, in hindsight the banks were simply the next bubble. And, there were some great businesses that came out of the dotcom era, such as Amazon.
There was a belief that tech companies were staking-out claims in the new online territory and would capture future opportunities. In general, the entry barriers proved low and good ideas quickly faced competition. As today, dubious accounting overstated growth, and made it hard to spot a lack of underlying growth or profitability.
We made a material investment in a new technology fund – Eurovestech. On day one, it traded at 10x the issue price, but with little liquidity. It seemed silly, but were forced to value it at that inflated level. It is clear now that the first day represented twice the lifetime value.
- What were the most bizarre or far-fetched dotcom stock ideas that you came across?
One of the most bizarre ideas was Atlantic Telecom, which was valued at £2.5bn, delivering data via microwave-based transmission to rooftop antennae. The fatal flaw seemed to be that birds flying across the transmission path corrupted the signal. Atlantic went under in 2001, undone by pigeons.
- What did you learn from the experience in hindsight?
In hindsight, what appeared to be significant founder investment in new businesses, instead often represented little real cash, or personal risk. Governance was poor: boards should have been more sceptical but were drawn into the euphoria. I learned more scepticism on accounting. Even today, many AIM companies flatter earnings and growth – significant earnings adjustments are commonplace. But, there is value in many of today’s technology businesses, though typically private. I have learned to find good specialist funds covering that opportunity and ensure that incentives are structured to manage conflicts.
A version of this article was published on Citywire on 27/01/2020.