Zell on Markets
"If you go back and study all of the oversupplies, all are a result of excessive loan-to-value, thereby reducing the developer's risk. When you reduce the developer's risk he becomes insensitive to building. If you don't have to put up real money -- your money -- and you don't have to take risk, then your ability to be an optimist is unlimited. It's an edifice complex."
"In `Jack and the Beanstalk,' Jack discovered that the beanstalk doesn't grow all the way to the sky. In order for a stock to grow, you always need someone willing to buy it from you at a higher price than you paid for it.
"Little by little, as valuations escalate, the absolute dollars required to keep the stock where it is keeps going up exponentially."
"On New Year's Eve, when Yahoo! closed with a $146 billion market capitalization [the per share price of the stock times the number of shares outstanding], I posed this theoretical question around the table: `If I gave you $25 billion in cash, and said take that money and put Yahoo! out of business by creating a competing entity, is there any doubt that it could be done?' "
Zell reveals that among his guests were several wealthy dot-com types, and all agreed that the company could be copied--with many billions left over to advertise and market widely.
Concludes Zell, "So there's a disconnect there with a market cap at $146 billion for a company that could be replicated for $25 billion. That's like buying an office building for four or five times what it would cost to replace it. Explain how you're going to make money?"
"The only change I'm aware of is that people are starting to value things based on revenue instead of earnings. Now we have the American version of the Japanese kiretsu [interrelated companies doing business with each other]. Venture capitalists invest in the companies, and then one company runs revenues through another, and vice versa, pumping up the numbers. Since these companies are valued on their revenues, it's like a giant Ponzi scheme."
"A venture capitalist in the early '80s would tell you that the formula was to make 10 investments--and hope for one home run, a few in the middle, and only one or two losers. But the home run would return 10-1, and make up for the risk. Well, today the expectation is that the home run will return 1,000 to 1. And all of a sudden, that possibility changes your entire risk profile, your willingness to take on risk. And that's what's attracting all the money."
As for the public, he notes, "I recognize the siren song that's luring everyone into this world is as alluring as it's ever been. . . . There's a belief that there's no perceived risk. And life is full of historical examples where there was no perceived risk. That always came just before the crash. If you're going to be investing in this arena, you always have to take some [profits] off the table. Take as much as 80 percent off the table."
"In `Jack and the Beanstalk,' Jack discovered that the beanstalk doesn't grow all the way to the sky. In order for a stock to grow, you always need someone willing to buy it from you at a higher price than you paid for it.
"Little by little, as valuations escalate, the absolute dollars required to keep the stock where it is keeps going up exponentially."
"On New Year's Eve, when Yahoo! closed with a $146 billion market capitalization [the per share price of the stock times the number of shares outstanding], I posed this theoretical question around the table: `If I gave you $25 billion in cash, and said take that money and put Yahoo! out of business by creating a competing entity, is there any doubt that it could be done?' "
Zell reveals that among his guests were several wealthy dot-com types, and all agreed that the company could be copied--with many billions left over to advertise and market widely.
Concludes Zell, "So there's a disconnect there with a market cap at $146 billion for a company that could be replicated for $25 billion. That's like buying an office building for four or five times what it would cost to replace it. Explain how you're going to make money?"
"The only change I'm aware of is that people are starting to value things based on revenue instead of earnings. Now we have the American version of the Japanese kiretsu [interrelated companies doing business with each other]. Venture capitalists invest in the companies, and then one company runs revenues through another, and vice versa, pumping up the numbers. Since these companies are valued on their revenues, it's like a giant Ponzi scheme."
"A venture capitalist in the early '80s would tell you that the formula was to make 10 investments--and hope for one home run, a few in the middle, and only one or two losers. But the home run would return 10-1, and make up for the risk. Well, today the expectation is that the home run will return 1,000 to 1. And all of a sudden, that possibility changes your entire risk profile, your willingness to take on risk. And that's what's attracting all the money."
As for the public, he notes, "I recognize the siren song that's luring everyone into this world is as alluring as it's ever been. . . . There's a belief that there's no perceived risk. And life is full of historical examples where there was no perceived risk. That always came just before the crash. If you're going to be investing in this arena, you always have to take some [profits] off the table. Take as much as 80 percent off the table."
