First Annual Financial Darwin Awards

There’s smart money. There’s dumb money. And there’s money so imbecilic it cries out for euthanasia.

A fool and his money are soon parted, goes the expression. Sometimes not soon enough.

Billions of dollars worth of good money are invested in projects with no hope of success. And some of them, even if they could be made to work financially, would merely blight the commercial landscape like trailer parks and strip malls along U.S. Route 1.

We tend to look down our noses at the fool who loses his money. But what is often forgotten is that he performs a valuable public service.

He is like the human landmine detectors used by the Soviets in WWII. It was a low-tech approach to finding a safe path through a minefield. But it worked. “Punishment battalions” were simply marched forward. Those who didn’t blow up showed the way forward. Those who did, well, they cleared away the mines.

How grateful the troops following must have been! Their comrades had cleared the way – and marked it with little scraps of uniform, blood and bootlace.

This is our opportunity to show some gratitude.

But it is hard to do them justice…or even begin to recognize them. There are so many…so many investment landmines that needed to be cleared away…and such little pieces left to identify them.

Yet, with no gun to their backs…no threats against their families …these selfless heroes marched forward on their own – with only the cheers of the mob and media to spur them on.

Investors in Bikini.com, for example, thought they were going to have a party. According to Dotcom.Failure – a website that tracks the progress of these ill-fated investments – the site “celebrates the perennially popular beach lifestyle.”

Addison volunteered to check it out…

“What do they do,” I asked. “How do they make any money?”

“I’m looking… ‘the most popular team of super-models in cyberspace’…hmmm…” Addison replied, absorbed…

Okay…well, I’ll return to that…

Here’s one worthy of an award: Millionare.com. Alert readers may think they have caught me in yet another spelling error. But let me assure you, this error is not mine. This is the way they spell it on the website.

The site promises to reveal the secret of making millions of “Internet dollors” – again, not my error. How? Well, send $10 dollors to an P.O. box in England and the secret will be yours.

There is no further information. Nothing else to do at the site. That’s it. And yet, investors actually paid as much as $4 for the shares in this company. Now, the shares can be purchased, in bulk I would bet, for just 13 cents.

Thirteen cents seems to have some kind of magnetic attraction for these exploded companies. As recently as Tuesday, Pets.com was available at 13 cents, too, after once trading as high as $14.

“Pets.com should certainly receive a Darwin Award,” writes Daily Reckoning researcher Rick Barnard. “In the first quarter of 2000, they spent $21 million on advertising (including $2 million on a Super Bowl ad) and only had $20 million in sales.”

Hmmm…that has to be a winning formula.

Pets.com blew up this week. The company announced it was going to put itself to sleep. “Now toy stores are filled with sock puppet dogs representing a company that no longer exists,” Rick continues.

Rick also nominates furniture.com for a Investor’s Darwin. It was not the business plan that impressed our researcher, but its execution. According to reports, says Rick, “furniture.com shipped over $1 million in merchandise and never billed anyone for it. …It was so focused on getting an IPO that it didn’t consider developing the business.”

And here’s one for the ‘What were they thinking?’ column, says Rick: FooFoo.com. The business plan was to be a kind of parasite site, using the content and products of other sites to sustain itself. It aimed to get a percentage of the sales. But, of course, there was no reason for anyone to pay a commission to FooFoo. Nor did customers have any particular reason to go to the site. Still, investors put up $5 million in seed money, with which, says Rick, “the managers bought a life-sized, light-sensitive, talking Austin Powers doll to greet employees at the front door.” FooFoo went belly up in May of 2000.

Have you ever been in the middle of nowhere and wanted to use a cellular phone? No? Well, no one else has either. People are in the middle of nowhere because they don’t want to spend their time blathering on cellular phones.

Still, you have to applaud the people who put up the money for Globalstar, a company that “provides mobile telephone service to regions of the world that are too remote to have standard cellular phone service.” Hmmm… at least here was a proven business model. Unfortunately, it was proven not to work. Iridium had already tried it. Its satellites came crashing down to earth only a few months ago – after that provider of telephone service to remote areas blew up investors. Globalstar announced, this week, that is was defaulting on its loans.

Finally, Addison looked up from his bikinis.

“Give it to me straight,” I asked him, “What are they doing?”

“I have no idea,” he replied. “But the photos are nice…” The company, with no visible means of support, is apparently out of business, though the website is still up. Life’s a beach. Then you file chapter 11.

I have been cogitating, this week, on the lack of imagination that keeps people from seeing the unintended, and often obvious, consequences of their actions. The Soviet mine sweeper brigades knew exactly what they could expect. And yet, they marched forward. Even a 1 in 10 chance of escaping death in the minefield was better than summary execution.

Could investors in Angryman.com have been any less sure of their fate? Angryman offered surfer-men an opportunity to share their bile and lose their money online. But to what end, other than a bad one? Courting the choler of the masculine sex must have been the result of something worse than a capital death wish. These guys must have had some kind of emotional problem. Thankfully, they have removed themselves from the financial markets. The only trace of the project today is an emphatic announcement on the web page that the site is OFFLINE! So take that!

But there were several strong candidates in the “men and women with issues” category. Another manly site, TheMan.com, was supposed to offer online sports and sex chat. Rick reports that just to make sure they would not be confused with legitimate businessmen or dignified human beings, the founders went so far as to get the company logo – a two-inch man in a suit – tattooed on their ankles. The company went out of business, thank God, in November of last year.

And, of course, there were the women’s sites. iVillage was such an obvious loser that I wrote about it 6 months ago. You could have bought the shares then for $6.47. But it would have taken a much less selfish man than I am to buy them – someone who just wanted to finance a cyber home for feminine kvetching…or blow himself up in a foolish cause.

In theory, women would want to go for a site “for women” just as men would want to go for one “for men.” But investors in these sites must have experienced a total imagination failure. Who could not have seen that the concept was as flat as a California lawmaker’s EEG? And yet, at one time – scarcely a year ago – iVillage and its sister site, Women.com represented as much as $2 billion of investors’ money.

Investors deserve an award for the scale of their losses as well as the absurdity of them.

iVillage is still in business. But shares are down 97% from their high…and at $1.38, nearly 80% from where I panned it.

Investors ponied up much less money for AllAdvantage. But the business model was at least as ridiculous. The company hoped to make money by sending checks to college students, layabouts, and shiftless people with time on their hands. The idea was to pay people to use the company’s browser…and make a profit by selling them things. But who would want to click around the worldwide web just to get a measly check from AllAdvantage?

My son, a college student, alerted me to the AllAdvantage business plan when he told me that his friends were all getting checks for surfing the web. He then explained that they had rigged up their computers to surf while they were sleeping.

Hmmm…my quick wit thought it detected a problem. What kind of commercial advantage could you get by paying people to surf the net in their sleep?

Well, none. In the first quarter of last year, for example, AllAdvantage sent out $32.7 million in checks to its drowsy members. It collected $9.1 million in revenue. Hmmmm, again.

And now, the company seems to have hit a landmine.

“The idiots owe me” says one comment posted on Dot.com Failure. “I never got one cent from these dorks and I am still waiting for the $14.53 they owe me.”

Apparently, there are many people who are waiting for checks from AllAdvantage. “Good luck,” says another. “They owe me $50…”

“They raised the min. payout amount,” explains a third, “…and the pay rate to 10 cents an hour, 10 hours max. a month. Looks like they are flat out of cash… These people need to start over with a new business model.”

Yet another poster offered this assessment: “Pay to visit a site? Really? Is a little more research in order here?”

But a little more research is not the way of the landmine detectors. They simply charge ahead, heedless of the risks. It is dangerous work. But thank God, someone’s got to do it.

Your correspondent,

Bill Bonner Paris, France January 19, 2001

*** Both the Dow and the Nasdaq rose yesterday. The former climbed 93 points, the latter 86.

*** The day was book-ended by two announcements from two very big techs – IBM and Microsoft. Early in the day, investors reacted to IBM’s news. The company beat expectations by 2 cents. Investors gratefully drove the stock up 12%. IBM is such a big part of the Dow that the effect was to add 76 points to the index.

*** At the close of the day, MSFT, announced that it had hit the lowered earnings forecasts that analysts expected. While not exciting news, it was nevertheless enough to send the stock up more than 6% in after hours trading.

*** GE also rose 2% in a gesture of solidarity and insanity.

*** But outside of the tech world, that is, in the economy of real things, Caterpillar said its profits would burrow down between 5% and 10% in the year ahead. The stock dropped 6.4%.

*** Oil rose 85 cents. And the HUI index of gold mining stocks rose a healthy 5%. Silver has been up each day over the last five trading sessions.

*** The euro was up a bit…bonds are doing well…

*** The Fed reports that industrial output fell 0.6% in December…the 3rd drop in a row. Output for the 4th quarter declined at a 1.1% annual rate, the first quarterly fall-off since the recession of 1991.

*** But inflation seems to be no threat. The CPI core rate rose only 2.6% over the last 12 months.

*** “This relatively low amount of inflationary pressure… has left the door open for the Fed to cut rates in response to the sharp slowdown in economic growth,” says a Washington Post article.

*** Most economists and observers continue to misapprehend the nature of a bursting bubble. No inflation? No problem…all the Fed has to do is to lower interest rates to get the economy hot and bothered again.

*** The trouble is, low inflation is what you get when asset prices collapse. And in a major collapse, neither lower interest rates nor tax cuts nor government spending can offset the effects of deflation.

*** Asset prices fall when investors run out of money, find themselves too deeply in debt, and realize that the expectations they have for their investments cannot be met. At the corporate level, overcapacity and bad investments squeeze profit margins. The only possible outcome – asset prices have to fall to more realistic levels.

*** Nor can an individual company buck a major cyclical downturn by spending more money. “Intel is on a suicide mission,” opined one analyst following the company’s announced intention to increase capital spending by $1 billion this year. “This is pushing the field of dreams concepts to a new level,” said Ashok Kumar, another analyst who follows Intel. Intel can add all the capacity it wants, he said, but that doesn’t mean the customers will come.

*** A Financial Times article mentions research by James Montier showing that stock returns are negatively correlated with expected growth of profits. “In other words,” explains the FT, “companies whose profits are expected to grow by the smallest amount, perform far better than those where expectations are high. The differential between the worst and the best amounts to more than 20 per cent a year. This suggests an obvious strategy – avoid those stocks where expectations are excessively high, and where disappointment is highly likely. Just by cutting out the losers, you can improve your portfolio performance.”

*** According to an MSNBC newswire report Pets.com announced on Tuesday it will change its name to IPET Holdings, Inc. Holding what exactly, I’m not sure… except for the sock puppet the firm used in its advertising campaign. You’ll recall, dear reader, the fledgling Pets.com made itself famous by spending $2 million on a single Super Bowl ad featuring the sock puppet…and in the process earned itself a spot on the list of potential recipients of this year’s First Annual Darwin Awards. Yes… more below…

*** Margin accounts fell to $198.7 billion in December, a 28.7% drop from their record high of $278.5 billion in March.

*** PG&E defaulted on some of its commercial paper yesterday, and according to the International Herald Tribune, Californians began experiencing some blackouts. The whole problem would go away instantly, of course, simply by allowing the market to work. Power prices would shoot up, allocating existing power efficiently to those who wanted it most…and suppliers would rush to sell California utilities more power to take advantage of the higher prices. Soon, there would be a glut of power…and prices would fall.

*** Alas, in Washington as in Sacramento, an opportunity for demagoguery and chicanery is rarely missed. Having made a mess of things by decree and regulation, politicians and the chattering class supporting them will now find ways to make it worse. And so it goes, dear reader, even at the very dawn of this great new digital age, human beings still shiver in front of open fires…hoping for mercy from the morons who rule them.

*** “CA Dairy Farmers Brace for Chaos” says an AP headline on a news website. Had the cows gone on strike? Were they getting mixed up…backing into their stalls…knocking over the milkmaids? I began to imagine the kind of bedlam angry cows, utterly out of control, might cause. It might be something out of a Far Side cartoon. So, I rushed to read the article. Alas, the article was not posted. I’ll have to wait for further news.