Porterian

This is my personal blog. Travel, financial and political observations. Notes to myself and my friends. Content development for my monthly newsletter, Porter Stansberry's Investment Advisory (www.stansberryresearch.com).

Monday, May 08, 2006

GILDER’S MISTAKE – NOT OURS







When I launched Stansberry Research in 1999 with the financial backing of Agora Inc. and the organizational support of The Oxford Club, George Gilder was the number one, most influential commentator on stocks.

Gilder had an Ivy-league pedigree. His father was David Rockefeller’s roommate at Harvard. When Gilder’s dad died in WWII, Rockefeller assumed the role of father figure, watching over George and helping him get ahead in the world.

When Gilder dropped out of Harvard, Rockefeller helped him get on board with the Nixon administration, where he was a copywriter (they call it a speech writer in politics.) Later he found employment with think tanks. Ronald Regan quoted him frequently. Forbes hired him as a columnist for its tech centric magazine, ASAP. And, behind this exposure he started his own newsletter firm, with several partners.

As the tech bubble took off, so did Gilder’s newsletter. By 2000 he was getting paid $70,000 to give a speech. And he could move stocks from $5 to $125 with a recommendation in his newsletter.

You could tell which stock he’d picked just by watching the ticker on CNBC. It would soar. He drew investment lemmings like rotting meat draws flies. Once a Gilder subscriber posted a recommendation of AT&T on the Gilder message board, as a joke, using Gilder’s digital signature “GG.” Everyone should have known it was a gag, as Gilder based AT&T management regularly, but some poor shmucks bought the stock anyways and threatened to sue.

Even corporate managements fell under Gilder’s spell. Motorola, for example, paid $400 million just for the right to manufacture a piece of communications equipment (“Terabeam”) that Gilder proclaimed was the Holy Grail of all of his “telecosmic” predictions. Too bad Terabeam was a flop and Motorola wrote off the entire $400 million.

In fact, all of Gilder’s predictions led to disaster. He heralded the WorldCom acquisition of MCI as the deal of the decade the wrote that WorldCom had “won” the race to the “Telecosm.” What happened in fact is that WorldCom paid far more than it could afford for MCI. The only race it won was the race to bankruptcy.

But this was all in the future when I launched Stansberry Research in 1999. Back then Gilder wasn’t a target for mockery; he was the most successful new publisher in our business.

I read Gilder’s books on economics: Wealth and Poverty and Recapturing the Spirit of Enterprise. I also read his book about Silicon Valley, Microcosm. I attended several of Gilder’s conferences, which cost $5,000 for attendees and which garnered millions of dollars in sponsorships from corporations hoping to catch Gilder’s eye and be added to his list of recommended companies. I thought Gilder’s ideas about wealth creation were right on, even if I had serious doubts about his economics and his stock picking (see below.). And I knew he’d learned a lot about silicon technologies by taking classes with famed Caltech professor Carver Mead.

I was so impressed with Gilder’s ideas and writing, I modeled my newsletters on Gilder’s. Our letters were story based and built around grand visions of the future. But…as the market changed…so did we. We cut our losses on the stocks that fell. And we wrote bear market warnings when we began to see the writing on the wall for the tech bubble in late 2000. The next year we launched a new letter, built on safe investing:  True Wealth. It’s now our biggest and best letter.

Gilder wasn’t my only intellectual mentor. Steve Sjuggerud taught me the importance of valuation when considering securities. Bill Bonner introduced me to the Austrian school of economics, whose ideas about the risks and dangers of debt were anathema to the supply side ideas of George Gilder. In 1998 I spent a day with Kurt Richebacher, the best living Austrian economist discussing the boom in stocks. In 1999 I went to China for two weeks with Doug Casey, a speculator who’d been in the market for thirty years. He told me the end was near for the NASDAQ bubble because the same gold-stock promoters he’d avoided for years were changing the names of their shell companies from “Gold Sham” to “Sham.com.” Doug and I sat and listened to a half-crazed Vancouver promoter trying to sell us on the idea of investing in his Bike.com business, where you could buy everything you’d need for cycling. We were sitting in the lobby of an old, grand hotel in Shanghai. It was unreal. And destined to end badly.

The Wall Street Journal did a follow-up story on Gilder today “Where Are They Now: George Gilder.”

According to the Journal, Gilder’s newsletter, at its peak, had 75,000 subscribers paying $295 per year. That’s over $22 million in newsletter revenues. And I know his conferences, which pulled over 3,000 people paying $5,000 each, made millions too. According to the newsletter industry scuttlebutt, at its peak, Gilder Publishing was making close to $20 million in profits per year. It had 50 employees.

Today Gilder Publishing has three full time employees and less than 5,000 subscribers. The subscription price has fallen too, to $99. As George told WSJ: “The typical Gilder subscriber lost all his money and that made it very hard for me to market the newsletter.”

Gilder himself was rendered insolvent after he decided to buyout his partners in the publishing company, in March of 2000, at the very top of the market.  As the stocks he’d touted to absurd valuations crashed, his subscribers canceled. And, as a result, he didn’t have the money to pay his former partners.  Says Gilder, “I was as close to bankruptcy as you can get without filing.”  Gilder avoided personal bankruptcy only because his creditors were also his friends. They put a lien on house.

George Gilder went from being a multimillionaire and the single most influential commentator on stocks, to being financially destitute – all in a matter of months. His reputation has been so badly tarnished that he can’t even sell books. His latest, “Silicon Eye,” was a flop.

I think about what happened to Gilder frequently. What happened to him could have easily happened to us. Why didn’t it?

  1. We, luckily, had access to better ideas. I wasn’t Rockefeller’s godson. The Republican Party didn’t indoctrinate me; its messianic, religious view of economics never made any sense. (See the letter below that I wrote to George on his message board in August of 1999. On his website I became a “gadfly” character, pointing out the fallacies of his economic thinking. He responded to my posts regularly.)

  2. Likewise, thanks to Steve Sjuggerud training, I knew cutting losses was the key to successful investing. After the bubble, we worked hard to expand our knowledge of stock picking and finance. Today Gilder still doesn’t understand how to value on equity. In this business, you must be a genuine financial expert, or else you will eventually blow up all of your subscribers.

  3. We expanded our titles as quickly as possible, building new publications that were in demand. Gilder only had one niche: new technology. In the stock market, tech comes in out of fashion regularly. You have to base your publishing business around bigger themes – like safe investing, income investing, value investing, global investing, etc.

  4. Because of Julia’s experience at the Oxford Club with the Chairman’s Circle, we understood the potential of lifetime subscriptions. Locking in your customers by getting them to invest $5,000 or more in your business means they won’t leave you when the market inevitably stumbles.

  5. Likewise, because of our experience with Agora, we knew the profits from the newsletter business would come mostly from the “backend.” Gilder’s only backend was his conference business, which by its nature is low margin. I invited Gilder to participate in our Diligence product…but he never understood why charging more for more specialized information was such a good business decision.

  6. We avoided being too closely associated with any one stock. Gilder was synonymous with WorldCom, JDSU and Global Crossing. Two of the three went out of business. Gilder was blamed. We didn’t let our editors continue to re-recommend the same stocks, month after month. We required that they cut their losses when they hit their trailing stop losses. And…where we broke these rules…it cost us dearly (VaxGen)…so we learned not to break those rules, ever.

  7. We never held ourselves out as visionaries or gurus. We made it clear, in almost every issue, that we were human and fallible. We demonstrated that our edge was merely our willingness to work hard, to uncover all the facts and to understand simple financial rules – it wasn’t our genius. By being humble, we did not set ourselves up to fall from Mt. Olympus.

  8. We worked hard on writing great marketing packages. Gilder’s success in the mail came straight from his track record and reputation. With both of those tarnished, he didn’t know how to get new readers.

  9. We understood the power of email and frequent communication. Gilder didn’t add a regular eletter until 2003. His newsletter was never published on any consistent schedule.

  10. We’ve never made any risky financial choices. Whenever I’ve had the opportunity to risk a large sum of money in pursuit of more money, I’ve declined. My philosophy is taken from Warren Buffett: “Never risk money you cannot afford to lose in pursuit of money you don’t need.”

**************************

A posting from “Aegis” (aka Porter Stansberry) to George Gilder
August 1999

Mr. GilderYes, your fans are correct.  It is very kind of you to humor me with your replies.  I certainly appreciate the opportunity to match wits.  And I'd really like to back away from the personal attacks, as I seem to provoke more than most.  I strongly disagree with your views on credit, but I have the highest regard for you personally and professionally.  (Please, don’t call me an economist…that really hurts.)You are quite correct to say that credit can lead to real advances.  Let's consider the 1920s.  A credit bubble was intentionally built by Ben Strong of the New York Fed and his counterpart at the Bank of England.  I doubt you would dispute this.  The discount rate went as low as 3.5%.  Business boomed.  The automobile was in abundant supply and radio was fast on its way.  The 1920s were a period of spectacular gains in wealth for all Americans.  Women especially made great advances.  Technology was ascendant.OK, so we know the good side of credit.  You can point to much of the same in today's economy.  The problems are more difficult to see, but just as real.  If you're looking for both evidence and effect, consider prices.  The 1920s, like today, were a period of tremendous productivity growth.  Wages and prices should have fallen, the latter much faster than the former.  But they didn't.  Credit inflation caused prices to remain steady, through the manipulation of interest rates.  The same thing has happened today and will always happen when politicians control interest rates. The fact that prices were distorted meant that information didn't reach producers.  See Sowell's excellent work on this topic.  Goods, such as cars, were overproduced because their prices were kept artificially high.The result was that tremendous claims were built upon assets whose value was inflated.  Profits and yields slowly disappeared.  After the bank of England was put back on the gold standard, the credit expansion ceased (1928).  The economy stopped growing in April 1929.  The crash came six months later.Mr. Gilder and many people on this board probably wish that I would go away.  They say that I bring nothing of value to the table.  Remarkably some people have even muttered that I must have missed the boom.  Some day when I reveal my identity, these doubts will be put to rest.  For now, let me ask you this:Mr. Gilder says that because we always progress, the credit cycle is meaningless.  And yet twice in this century investors have gone 26 years without any real return in the stock market (if you bought in ‘29 or in ‘66, you made nothing in real terms for 26 years.)   He wants you to believe that the Great Depression and the 1970s energy crisis were no problem.  Maybe for him it wasn’t a problem…
I say that more money doesn't create more value.  If we’ve become productive (and I think we have), then why haven’t prices and wages fallen?  Ask Greenspan.  

I say that credit bubbles are dangerous because they distort the economy.  

I say that sound money and banking should be part of our constitution: that property rights are human rights.

Most importantly, perhaps, I say that you can’t judge the distortions in our economy by measuring the current prices of assets because those assets are measured only in paper dollars whose value is controlled by the same man who is promoting this credit bubble.

-- Aegis