The Tycoon Report

Are we Headed for Another Disaster?

Wednesday, March 14, 2007 | Wayne Mulligan

How does that old saying go?

“Those who don’t learn from history are doomed to repeat it?”

I think that was it, and it makes a lot of sense – regardless of how cliché it may sound – especially when we view it in relation to the stock market.

If you’ve ever read Reminiscences of a Stock Operator, then you know how important it is to learn from every mistake you (and anybody around you) have made in the market.  It’s the only way we can become better investors.

But for some reason, the vast majority of investors never seem to learn from their respective pasts.

I guess that’s good for people like us – investors who are adamant about our education and improving our market performance one step at a time.

In fact, before I get to the meat of this story, I wanted to take a minute and give some major kudos to two of my colleagues:  Teeka Tiwari and Dylan Jovine who, within a few days of one another, wrote some of the greatest articles on how to improve yourself as an investor that I’ve ever read.

In case you didn’t get a chance to check them out, here are the links below:

Want to Learn How to Invest

Learn to Trade Like a Zen Master

Great work, guys!

Now, back to my original point about fools…oops, I meant “folks” who don’t learn from their past…

Basically, most people who trade in the market tend to simply follow the crowd – I won’t go into the psychosocial reasons why, but trust that I’ll have an article on it sometime soon – and therefore, never really learn from past mistakes.  Most folks just assume that if everybody else is doing it, they should do it, too.

Case in point:  Profitless technology companies going public!

This really flips me out – it was only six short years ago when the market, at the height of its optimism, took a spectacular swan dive that reverberated throughout the global financial markets for years!

What did most analysts and investors attribute this to?  Good question…

The answer:  The IPO market for technology companies!

Back in the dot-bomb days, we had a rash of companies in the tech sector going public with little more than a “path to profitability”.  Needless to say, most of those “paths” led to exchange de-listings and businesses being closed. 

Now one might assume that there’s no way that this sort of trend could ever start again – everybody learned from their mistakes last time…didn’t they?

Well, not according to a recent Wall Street Journal article that shows an alarming trend in technology IPO’s.

According to Thomson Financial, almost 50% of the tech companies that went public in Q4 2006 were unprofitable – even more troubling, 62% of the companies on deck to go public now are in the red.

While this isn’t as insane as it was back in 1999 when 85% of tech companies that went public were unprofitable, it’s still showing a scary trend.

People are really going for “the hype” again and lacking any sort of financial discipline – according to The Journal’s article, in 2005 the average revenue for a tech company that went public was around $115 million.

In 2006, that number dropped to $77 million – that’s almost a 35% drop in average revenue.

Most recently, Salary.com (Nasdaq: SLRY), which went public last month, only had a little over $15 million in revenue – and on top of that was showing a $3 million loss.

I’m not sure what we’re headed for here, but it can’t be good – this phenomenon on top of what we’ve been seeing in the private equity/venture capital markets (See my February 7th article on this exact topic) has this writer very concerned.

Keep your guard up and your wits about you, my friend – don’t get caught following the crowd this time around!




Wayne Mulligan
Contributing Editor
The Tycoon Report