Fool's Eye View

[ February 17, 2000 ]

Death, Taxes and the iii Float

By Maynard Paton (TMFMayn)

Carburton Street, London -- Whenever novices start to consider investing directly on to the stock market, there is always doubt in their minds. The doubt stems from uncertainty. And uncertainty stems from lack of a knowledge. A lack of understanding about the company they are investing in, and a lack of understanding about the valuation of that company, leads to the indecision. Beginners can become hesitant.

And it's easy to see why. The stock market is a roller coaster of emotions, pushing prices higher and lower in unpredictable ways. The sharp and severe movements, seemingly dependent on a never-ending stream of financial gobbledygook, do intimidate the unwary.

But some beginners can manage to overcome all their self-doubt. Paradoxically, another fear can overcome their initial hesitancy. That is the fear of "missing out" on a "dead cert". The attraction to beginners of the apparent investment certainty is obvious. No understanding of the company is needed. No need for headaches calculating a fair valuation is required either. With a sure-fire winner on your hands, all the boring time-consuming and number-crunching research can go out of the window.

There is an old saying that "Nothing is certain but death and taxes". After sensing the general mood and sentiment of investors lately, I'm going to add a third certainty to that observation -- the short-term rise of interactive investor international (LSE: IIN).

Is iii a guaranteed short-term success? All the signs are there. Firstly, it's Internet. And as we all know, anything to do with the Internet is stock market vogue at present. And secondly, virtually all the prospective shareholders, visitors to the iii website, are investors anyway. An oversubscription for iii shares, to put it mildly, was always on the cards. Most pundits are expecting the shares to rapidly rise in the days after the float.

But was taking part in the iii float Foolish? Are you a Foolish long term investor? Or are you just speculating on a short term punt?

Having perused the iii message board, it appears that actual comment on the fundamental attractions of iii is very limited. Hyksos gives his illuminating thoughts in this magnificent post.

However, most iii remarks sadly concern the application process, rather than the iii investment decision itself. When you spend more time considering what sort of pin is needed to attach your cheque to the application form, whether your cheque needs a name and address on the back, or the significance of the coloured triangles on envelopes, than what's in the prospectus, you know you're a speculator.

Visions of short-term share price gains appear to cloud any rational appraisal of the company. But of course, any appraisal of iii is limited anyway. Why? Because the company generates no profit and possesses no assets. An assessment of iii is limited to such "fundamentals" as the number of Unique Visitors or Page Views. And the speculator cares not for those figures.

Further judgment is based on the very subjective opinion of the iii site, its services and the message boards. Overall, any evaluation of iii is based on your expectations of a loss-making startup operating in an unpredictable, but significant, industry. No one really knows how, or dare I say if, iii will succeed financially, over the long term.

But the Foolish long term investor, confident in his or her belief that iii has the ability to make a profit and succeed over the next few years, will tuck the shares away and occasionally monitor iii's fundamental performance and news flow. The speculator will make assumptions of iii's financial performance from the daily share price movements. Can the iii message board expect a deluge of "The shares are up, should I sell or buy?" type messages? I fear so.

If you're a believer in the iii long term story and prepared to hold for few years, then the float gave a good opportunity to invest. But I suspect most applicants for the float envisaged short term profits from the investment "certainty".

And so, the signs of a speculative froth are building. One only has to look at the queue of companies coming to the market imminently -- Lastminute.com, just2clicks.com, Sojewish.com and BigSave.com. All flotations to fulfill the insatiable demand for the "dotcom" investor, with the company owners only too eager to sell.

Do Internet investors consider that a flotation is the only time the owner of a business gets to set the share price, and thus determine the valuation, of their business? It's unlikely that as an owner of a business, you'd want to sell out on the cheap. If you owned a great business with superb long term potential, why would you sell out, especially at the embryonic stage that iii is at today?

So, if you've been disappointed with your allocation of shares from iii, will the numerous other Internet companies immediately waiting in the wings now become suitable alternatives?

Perhaps. But Foolish investors need their wits about them in these heady days of the Internet IPO frenzy. Following the herd into an investment has never been a recipe for long-term financial success. What's required is thinking. And never has the investment brain been more of a requirement when considering which, if any, of the upcoming Internet flotations should be contemplated.

Investigating the fundamentals, the underlying business model and the financials, should all take precedence over considering the apparent "certainty" of making "a quick buck". As the "success" of Internet flotations continues, so there will be more and more opportunities to join the bandwagon.

But as the volume of opportunities grows, so the quality of the opportunities declines. As opposed to the apparently risk-free flotation gains, holding expensive rubbish when sentiment turns against you leads to the only true certainty in investment. The certainty of losing money.

And to end, a quote from Voltaire: "Doubt is not a pleasant mental state, but certainty is a ridiculous one." I'm not aware of Voltaire's overall investment success, but I'm pretty sure he didn't get caught out in any investment euphoria.

All feedback is welcome and can be directed to the interactive investor international, or Fool's Eye View, message boards.