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Making
things happen - with integrity. A Weekly CyberMemo designed to keep you on task. Monday, March 13, 2000 Volume II Number 11
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FOCUS - Sell Low, Buy High
It’s a measure of common sense. It’s not rocket science.
Most everyone agrees with this one – if you want to make money, you buy low and sell high. The opposite is a recipe for financial ruin.
I watched the cycle repeat itself several times when real estate was the only game in town. It was an era of extraordinarily high interest rates. You could get a bank certificate of deposit that would pay you fifteen percent – or more. No one wanted to buy into the stock market. The Dow Jones Industrial Average hovered around eight hundred points. For years. There was no NASDAQ.
Real estate attracted lots of interest. And the road to participation in the big development was the limited partnership.
A general partner would rent a conference
room at the best hotel in town. His
well-dressed staff welcomed potential investors with wine and cheese. Waiting at each place on conference tables set in neat rows
was a full color brochure with wide-angle shots of gleaming chrome and glass
office buildings surrounded by brightly colored gardens and manicured lawns all
against a cloudless blue sky. After
a 
warm
welcome, a dazzling 35mm slide show. (This’ll
date me - this was the pre-Power Point era – remember the Kodak
Carousel projector? Now there’s
a dinosaur.) An accountant
would outline the generous tax breaks. An
attorney would verify the legalities of it all. Demographics, testimonials, and growth charts would all point
to the ultimate wisdom of writing the check.
It may take six months or more and a long series of wine and cheese
gatherings to raise that first million or two of investor capital.
If the GP (general partner) was successful that first go-‘round and if that first deal went well, he was all set for the next one. Now he had what analysts call a “Track Record.” Investors would eagerly invite their friends to the next wine and cheese. Instead of a couple million, the GP would now have tens of millions to take out there into the marketplace and shop for the next deal.
If he made it to the third round, the evening wine and cheese show would go national. Instead of tens of millions, he’d have a hundred.
But by this time, he was competing with other wine and cheese veterans with a hundred million in their account. All of them trying to buy the same properties.
And by this time the GP is rather enjoying his new life. Now, he occupies the new office suite on the top floor of one of those high-rise chrome and glass office buildings, the one with the big view of the city. Standing next to his massive walnut desk and high back leather executive chair, he looks out on the mountains off in the distance to one side, shoreline on the other. Those regular weekend conferences at five star hotels in exotic places around the world are pretty nice. And the Mercedes in the reserved slot at the entrance to the parking structure and the new house up the hill and the gardeners and the nanny and the pool man and the private schools… well, they were pleasant rewards for the hard work of fund raising.
But here’s the catch. Fees for the GP were so generous on the front end, back end profits - the investor’s anticipated share - just sort of fizzled into oblivion.
In the beginning the purchase of the raw land was a carefully crafted bargain. Architects were whipped into reality. Contractors were scrutinized at every turn. Every expense was carefully reviewed.
But now with lots of cash in hand, competing with a whole pack of other GPs, land purchases became sloppy and hurried and overpriced. Over-paid architects designed bloated, expensive, inefficient buildings. Contractors took advantage of fat contracts. Banks jumped in with heavy fees and high interest rates, leveraging investor dollars, multiplying available development capital.
A once lean mean general partner who at first spent long days pouring over every aspect of the deal, was now the proud owner of an albatross. It was the early nineteen eighties. Vacancies were rampant. Occupancy rare. It was not only an albatross, it was an empty albatross. A see-through office building. The GP and his investors now landlords of a high priced carpeted wasteland, complete with elevators.
Next came the collapse of the house of cards.
With no rent income to pay back the debt, federal and state judges shut down the GPs and handed their properties over to receiverships. Attorneys and accountants burned up cash reserves attempting to recover investment dollars. (Did you ever notice that some unscrupulous accountants and attorneys get paid on both ends? First they tell you that it’s legal. Then they spend whatever’s left to tell you that you’re bankrupt.) The federal government shut down the banks and Savings and Loans. The IRS went back and denied those tax breaks, demanding back taxes from those poor folks who got so enthusiastic back at the hotel sipping wine over Monterey jack cheese watching slide shows.
It was a mess.
The GP who early on vowed to buy low and sell high ultimately got it backwards.
* * * * * * * * *
This week, there was a stock market flight from the Old Economy to the New Economy. That’s what they say.
Hey, I’m celebrating the gains of the NASDAQ, too. But I’m concerned about the notion floating around these days that says the “Old Economy” is history. It isn’t.
The new LPs are IPOs. In the late seventies and early eighties, Limited Partnerships dominated the investment scene. Today, Initial Public Offerings (IPOs) are the popcorn of on-line trading. The name of the game is still raising money. Call it what you will. Funding. Capitalizing. It is still raising money. The LP General Partners rented hotel conference rooms. Issuers of IPOs send out e-mail alerts. It took months for the LP to raise ten million. IPOs reap tens even hundreds of millions in seconds.
Some of those GPs are still around. Twenty years from now, some of the IPOs will be around, too.
But what happens to a company with too much money to spend? Sometimes the outcome is well, disappointing.
The so-called “New Economy” is at the leading edge of the current revolution. It is the internet stocks. The NASDAQ.
Remember this: the Internet is a delivery system. It fundamentally changes our whole concept of how goods and services are delivered to the marketplace.
But if there is to be profit in delivery, there must be goods and services to be delivered. Projected growth and profitability are based on a brand new system, a new way of thinking, a paradigm shift… but with nothing to drop into that system, the system is meaningless.
The so-called “Old Economy” will always be there. Don’t abandon it.
Proctor and Gamble’s timing was way off.
The time tested Blue Chip manufacturer of soap products
announced that earnings would be somewhat off Wall Street projections.
The news hit a market seething with volatility.
It pressed the e-mail alert button like a starting gun at the LA
Marathon, triggering the herd to sell Blue Chip and buy NASDAQ.
P&G stock dropped thirty percent in a single day.
The world of the Internet has figured out a whole new way to get products to market, but it still needs products. P&G may not manufacture chips or circuitry or software… but last time I checked, the world still needs soap.
In a frenzy of irrational exuberance, a whole army of day-traders and fund-switchers and do-it-yourselfers sold low and bought high.
* * * * * * * * *
There’s a new debate raging in management circles. Does one build to last? Or build to flip?
For some, it is considered passé to focus on long-term business goals. The new world is the world of the “flip.” “I flipped the company” is the new way of saying “I sold the company in record time.” Flipping is adding value then taking profit. It’s the quick turn-around.
Don’t be ashamed of short-term profits, says the flipper. Go for it.
Some managers and venture capitalists consider the old “build to last” model a hopeless thing of the past. They have zero interest in a business plan designed for longevity. Bring me one that will sell, they say.
So the hot business rage is the big idea. The concept. The vision. Then how do we package it for Wall Street? How do we create the illusion of profitability and future market share and stuff it into a slick business plan?
The whole thing reminds me of wine and cheese at the Ritz.
* * * * * * * * *
It’s Monday morning, March 13th. Our economic system is the most powerful, most stable, most promising system in the world. You are right there, poised to capture your piece of it.
Go get a generous helping. If not now, when?
While the trends of the moment sometimes seem to contradict everything you’ve learned about how to succeed, remember some of the basic realities that will never change.
Ø Be a contrarian – don’t just follow the herd.
Ø Build your net worth with new money – continue packing away those monthly contributions.
Ø Keep your stock portfolio diversified.
Ø Do due diligence.
Ø Beware the flipper.
Ø Don’t simply sell the dogs and buy the thoroughbreds just because everyone else is.
Ø Today’s “plunge” may well be tomorrow’s “skyrocket.”
Ø Today’s “skyrocket” may well be tomorrow’s “plunge.”
Ø Greed is not good.
Ø The illusion of future profit should not be confused with profit.
Ø Build it to last.
Ø God is alive and he is not silent.
Oh yeah, one more. Buy low, sell high.
© Copyright Kenneth E. Kemp 2000
Special Thanks to my good friend David Belcher, owner of Rhino Media Group and creator of WisdomGram
LeaderFOCUS is a service of Good Stewardship Associates
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