Internet Still Offers Abnormal Positive Returns

by: Ashkan Karbasfrooshan

James Altucher - who sold his StockPickr company to (TSCM) less than a year after founding it - argues that investing in Internet stocks is a loser’s proposition, mainly because none of them really generate money:

Time Warner (TWC) would rather keep their legacy old-media businesses like People magazine than hold onto one of the biggest Internet companies out there, AOL. And News Corp. (NASDAQ:NWS) is shaking up its MySpace business as it figures out its next steps. (News Corp. owns Dow Jones (DJ), publisher of this newswire.) Microsoft (NASDAQ:MSFT) has spent billions on Internet strategy without a dime of profit. And even Google (NASDAQ:GOOG) can’t seem to find any other business model other than the one they stumbled into when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. And the new guys: Twitter and Facebook are still scrambling for profits despite blistering usage growth.

The Internet is far from dead - even as an investment - provided you know what the hell you are doing, and let’s face it, if the Econocalypse proved anything, it’s that experts don’t have a clue what they’re doing.

I’ve met James and respect his articles and his investing acumen, but he’s over-simplifying things considerably.

- Not all investments are identical

Internet investments prove wildly profitable when you invest early. For sure, by the time some of these companies IPO (all apart from Google), most of the returns are baked in.

Take Altucher for example, he had an idea, funded it, then sold it within a year. How on earth is that not a winner strategy?

- Those who were supposed to pick winners amongst startups failed

Venture capitalists are trusted to pick winners amongst startups, and judging by their own doom and gloom mood, you get a sense, they failed their investors.

- Business need to invest more than ever in the Internet

The publisher who posted this argument, the Wall Street Journal, seems to disagree with Altucher, after all, the more they invest in their online platform, online ad sales teams, micropayment solution etc., and less they think of chopping off trees, the rosier their future. But don’t ask me, just ask the Sage of Obama, Warren Buffett:

If Mr Guttenberg had come up with the internet instead of movable type back in the late 15th century and for 400 years we had used the internet for news and all types of entertainment and all kinds of everything else and I came along one day and said I have got this wonderful idea we are going to chop down some trees up in Canada and ship them to a paper mill which will cost us a fortune to run through and deliver newsprint and then we’ll ship that down to some newspaper and we’ll have a whole bunch of people staying up all night writing up things and then we’ll send a bunch of kids out the next day all over town delivering this thing and we are going to really wipe out the internet with this… it ain’t going to happen.

- Don’t judge prematurely, it’s the exit that counts

It’s unfair to dump on a sector when the entire economy has taken a hit and we find ourselves in a bear market - most recent 25% run un notwithstanding.

The problem with Internet companies is the perception that Twitter, Facebook, Digg, etc. represent Internet companies. They don’t. They represent a segment of web companies that are amazingly successful from a consumer perspective and capture the media’s attention but that in any other realistic context would be simple features of an actual business. Venture capital allows them to function for a time being as stand-alone companies, but over time, these tools will add value under various other companies, either by way of acquisitions, mergers or public offerings… which will give shareholders some form of return or another.