Memo To: Alberto Vilar
From: Jude Wanniski
Re: Congratulations! You Did It!!!
Yes, it would have been nice if Amerindo Technology Fund could finish 1999 up 250% for the year, but 248.9% is not too shabby. Good enough for Lipper to name yours the best mutual fund of the year! My website browsers know I'm on your board of directors, but I still want them to know how proud I am to have watched you and Gary Tanaka play the NASDAQ and the Internet stocks like a violin -- ducking out and ducking in at just the right times. When you asked me four years ago to join the board at the inception of the fund, I remember thinking how I really did not need any more demands on my time... but when you told me flat out your record as an asset manager was close to being peerless, and that you wanted to help some not-rich people get rich instead of rich people getting even richer, I decided I wanted to see this for myself. I remember even then your enthusiasm for the Internet, at a time when Bill Gates was still scratching his head.
Yes, the first year was a bummer, as the bottom dropped out, but you were as cool as a cucumber. YOU KNEW what the Internet represented, and you knew as you put it then, WE WERE STILL IN BATTING PRACTICE. The game had not even begun. And now, when the conventional wisdom is still talking bubbles, bubbles, bubbles, you think we are only in the second inning. And I can see it so much better by watching you and your team up close. My memo on June 23, 1999, "Way to Go, Alberto," marked the fund doubling in value from January 1, actually 102.4% for that day. I ran your entire first quarter client letter then and today repeat the section dealing with the Internet world. It is classic Vilar and well worth reading again as we begin another leg of the Internet Age.
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As the current economic cycle embarks on its ninth year, it is close to being the longest on record in the post-war period and yet it shows no signs of recession-creating imbalances that typically emanate from age. A new theory for this very positive economic setting has been the Internet's increasing impact on American business and life. The numerous benefits of the current generation of information technology, the third in 40 years, which we have labeled the Internet generation, are being diffused throughout the U.S. and global economies more quickly than other technological advances did during previous industrial expansions in the past. These benefits are effectively creating another industrial revolution. They include huge cost savings due to less need for capital, inventory and intermediaries, plus better and more timely information, which is resulting in more convenience, time savings, etc.
The build-out of the Internet infrastructure currently taking place will provide support early in the new century for one billion interconnected computers utilized by several hundred million people. The Internet will facilitate an explosion in electronic commerce (e-commerce), which will revolutionize business interaction. E-commerce can take corporate overheads, which have been under downward pressure owing to the containment of inflation and increased global competition, down another notch in costs. Key cost centers like distribution, communications, billing, etc., will become cheaper to run and easier to outsource. The opportunities for cost cutting are virtually endless through the substitution of many Internet-related technologies like video-conferencing, and through the outsourcing of key functions such as expense management, taxation, pay-per-use software, etc. While critical business functions will be performed in-house, many subordinate tasks will be outsourced to the best people available. The Internet also offers the opportunity to reduce some of the inefficiencies in corporations' supply chains by making it easier to implement just-in-time delivery and make bill collection and payment simpler and cheaper. Businesses will be increasingly incentivized to cut out the middleman in distribution, where such costs can range between 10-20%, by shipping directly from the factory to the end user. These Internet-induced changes will cause a fundamental restructuring of many business models over time. Companies that are successful in adopting Internet technologies will encounter a higher margin, more scaleable business model. On the other hand, a significant number of S&P 500 companies are at great risk because of their inability to integrate the new Internet economy into their business, which will place them in severe competitive disadvantage.
The Internet will be the catalyst for a massive increase in corporate investments as companies strive for a competitive edge. A spending boom to adapt Internet solutions to many business issues will be targeted at websites and at other peripheral areas that complement business e-commerce. Whether the Internet ultimately becomes a great low-cost method of distribution, or a disruptive force near term, it appears destined to be the next millennium's industrial revolution that could have as profound an impact as the Industrial Revolution did on the economy a hundred years ago. Business operations could become so efficient that profit margins could be maintained in the face of price reductions resulting from slow growth and intensifying competition. If Internet solutions are successfully implemented on a wide scale and actually impact corporations' global cost structure, as we have predicted, the world economy would embark upon a period of accelerated growth without inflation.
The powerful advance of the Internet sector raises the perennial question of current stock over-valuation, especially in view of their negative, or at best, modest earnings. We believe the investment significance of truly unique and profound, once-a-generation developments, like the Internet have the ability to significantly transform the global economy and cannot be initially assessed by traditional valuation yardsticks such as p/e's, price to book, price to sales, etc. that apply to companies well along in the maturation cycle. Technology stocks that offer the prospect of creating new multibillion dollar industries tend to move well ahead of their earnings, sometimes by several years. Successful investing in technology first requires the early identification of a new technology that can become a major business sector capable of immense growth. The second requirement for real investment success is to pick the companies with so-called "first mover advantage." Ultimate winners can increase from 10 to over 100 times, which makes the interim volatility of the stocks justifiable. We have been on record for some time in our prediction that we expect to see the Internet sector create $2 trillion in new market wealth over the next 5 to 7 years. This will be the result of the growth in Internet users in the next few years from 100 million plus to at least 300 million, plus a huge shift in business-to-business activity to e-commerce on the likely order of $1-2 trillion. So far only 10-15 % of this major new market wealth has been created. It is still very early in this revolutionary new technology cycle.
As noted above, we caution that a correction of both the broad market and the Internet sector is an increasing probability at some time in the second or third quarter. The broad market is selling at an unprecedented ratio of earnings growth to p/e of over four. The broad market could correct 15-20%. Further gains in the broad market still require a major turn up in global earnings next year, which is not yet in the cards. The Internet stocks are likely to have another "V" styled correction in the months ahead, and rebound strongly before the year closes, thus turning in yet another year of spectacular gains.