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Tuesday, 12 March, 2002, 09:33 GMT
Dot.com doomsters see more share falls
Nasdaq chart
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By Mike Verdin
BBC News Online business reporter
line
In the second of a week-long series of reports, BBC News Online discovers why two prophets of the bursting of the dot.com bubble believe shares may still be overvalued.
Tony Dye, investment manager, sits in his offices near the Bank of England, his remaining locks cropped close to his skull.

"I felt like tearing my hair out," he says of investing in the late 1990s.

"It was terrifying. There was this belief that everything to do with telecoms, media, software was going to be the next Microsoft. And everybody felt they had to join in."


I have learned in my own career as an investment manager that you should never bet the farm on one view

Alastair Ross Goobey

Everybody apart, that is, from Mr Dye, who had since at least 1996 warned against investing in unprofitable technology companies.

His stance earned him the sobriquet "Dr Doom", and his employer, Phillips & Drew, a lowly ranking in the fund management league, as dot.com-embracing rivals rode the bubble for millions.

Clients such as Marks & Spencer left, and P&D saw the size of its managed fund shrink from 53bn in 1998 to 47.5bn a year later, despite a rocketing FTSE 100 share index.

Down and out

Mr Dye's personal stock also plunged, to laughing status.

Ranked number 60 in The Observer newspaper's "Power List" for 1998 - ahead of Pope John Paul II and film-maker Steven Spielberg - Mr Dye was a year later ridiculed.

Nick Evans, Framlington NetNet
Nick Evans: Difficult task

"She was really appalling. Truly, truly appalling," he says of a journalist who subjected him to particular attack.

"She is one of the people who kicks the arses of people who are down, and licks them when they are up."

There was little surprise when Mr Dye and Phillips & Drew parted company.

The irony was evident only in hindsight, that Mr Dye's exit had, in March 2000, come days before fortune fled the Nasdaq, the stockmarket that had become a benchmark of dot.com profitability.

Funds fall

Pressure leapt to the likes of Nick Evans, who was put in charge of Framlington's dot.com focused NetNet fund when, in August 2000, share price falls gathered pace.

"It was difficult," Mr Evans says. "I ran a slightly higher cash position.

"But I also had to remember that people had invested in the fund because they wanted exposure to internet stocks.

"We looked broader for companies with an online element. Which had a strong cashflow, but which were online."

Such a strategy could not prevent NetNet units sliding last year to a little more than 10% of their 151p peak. In their first year, they had tripled in value,

Even the Nasdaq itself saw its profits hit as the number of company flotations it handled plunged from 485 in 1999 to 63 last year.

Phillips & Drew, meanwhile, was able to report a top-ranking performance, albeit in Mr Dye's absence.

"The firm has stuck to its guns and now got a fabulous long-term track record," Mr Dye says.

'Appalling' decision

Yet many observers still question the wisdom of ignoring a dot.com boom which saw the Nasdaq rocket from 751 in January 1995 to 5,048 in March 2000.

Alastair Ross Goobey, chairman, Hermes Focus Asset Management
Alastair Ross Goobey: Slammed doomsters

By then, investors who had bought shares in online ad firm DoubleClick at flotation two years earlier were boasting gains of at least 400%, while stock in Network Solutions had soared by 20 times since its launch in 1997.

Mr Dye's dogma meant Phillips & Drew clients "missed out on the great US bull market and on the rise in technology media and telecoms stocks around the world", investment guru Alastair Ross Goobey has said.

"As a business decision it was appalling," Mr Ross Goobey told pension industry chiefs last year.

"I have learned in my own career as an investment manager... that you should never bet the farm on one view."

'Stupid' forecasts

Mr Dye scowls.

"What an awful statement, that following a view based on rational analysis is an appalling business decision.

"'Betting the farm' is a strange way of looking at investing in solid companies that have some assets and earnings, and not investing in companies that are colossally stupidly priced."

He recalls the day in 1999 he received a research note on chip design firm Arm Holdings.

"I looked at the assumptions behind the valuation, and cranked up what would happen to the firm relative to the economy over the next 25 years.

"Essentially they were forecasting that Arm would then account for 15% of UK economic output, 11% of UK profits.

"Yet this firm makes a tiny bit of microchip." And microchips, Mr Dye says, are just "tomorrow's widgets".

"With my strategy I was not betting the ranch on an evens bet. There was a 1-10 chance, more, that the bubble had to burst."

Early loser

The problem lay in forecasting exactly when.

While Mr Ross Goobey may, with hindsight, be able to identify the risks of quitting the bull run too early, the fate of Jeffrey Vinick highlights the difficulties of identifying a bubble's bursting point.


All stock markets in all countries at all stages in history have always fallen back to, or below, their long term trend line

David Schwartz, stockmarket historian

After steering Fidelity's Magellan fund, America's biggest mutual fund, to gains through holdings in technology stocks, Mr Vinik, fearing stock market "euphoria", switched cash to bonds.

That was in 1995. With the Nasdaq continuing a rise which saw it soar 45% in 17 months, Mr Vinik resigned in May 1996.

Even Alan Greenspan, head of the US Federal Reserve and arguably the most powerful man in world finance, was so concerned about the extent of share rises that he in 1996 ordered a probe into stockmarket bubbles.

The conclusion disappointed him - they could be accurately defined only in retrospect, Fed economists said.

Outlook for shares

And discovering exactly why a bubble bursts seems to be impossible even in hindsight, according to analysts BBC News Online spoke to.

David Schwartz
David Schwartz: All smiles - for now

"Fundamentally it happens when the last buyer puts in his last buy order," says David Schwartz, stockmarket historian and crash prophet. "Beyond that who knows."

What Mr Schwartz is certain of is that the major stock indices are still high by historical perspectives.

"All stock markets in all countries at all stages in history have always fallen back to, or below, their long term trend line," he says.

"For the major indices and particularly the Nasdaq, that is below where it is today."

Indices can return to trend either through sudden falls, or bumping sideways, overall, for several years.

While he sees the FTSE and Dow Jones industrial average rising this year, the Nasdaq is set to head crabwise for perhaps eight years.

"The chances of it going up this year are about the same as it snowing in July in Las Vegas."

This from a man who at the end of 2000, when the Nasdaq stood at around 3,500, earned hate mail for predicting it would fall below 1,500.

As it did last autumn.

Misery to come?

Tony Dye offers even less comfort.

For the tech boom he sees as only a "sideshow" to a broader stockmarket bubble dating back to 1995.

"This has yet to be unwound," he says.

"And the aftermath of these things is always bad.

"People have borrowed more and more to invest, and end up in real difficulty. Or see all their savings wiped out."

Unfortunately it appears that only with hindsight will we discover if Dr Doom's prognosis is right again.

On Wednesday, BBC News Online meets the internet entrepreneur who ordered an indoor lawn, and discovers what happened to dot.coms' t-shirt and pool-playing culture.

See also:

11 Mar 02 | Business
Dot.coms toil to defy the doomsters
27 Jun 01 | Business
Nasdaq stock market cuts jobs
10 May 01 | Business
When not to believe the experts
10 Jan 01 | Business
The return of Dr Doom
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