Friday, January 23, 2009

The Mess We're In

A few hard headed friends have, not unreasonably, pointed out that an investment in the Internet TV industry over the past decade was like burning money.

For a sector with such potential, where VCs, even today, in these challenged times, are pouring money, the lessons I have learnt are salutary. And probably point to why the public markets are a hopeless place for any nascent industry until regulations change.

So, let me try and explain what happened. I'm going to take bad management and hubris out of this equation; although this was, and remains, a sector with dreadful management.

And this post also has important lessons as to why we are collectively in the mess we're in.

But let's get to the crux. Shorting a company is far easier than 'going long' - that is, buying shares in a company. You can only buy as many of a company's shares as exist, but you can sell ten times the number of a company's shares by going short - that is borrowing share to sell at a price below the purchase price in the future (whereby such trades are public and affect the share purchased's price).

As a result, any company without a hardcore 'retail' (that is small investor) following is hugely vulnerable. The market is their enemy, irrespective of how the company is performing.

In the US I used to present to investors and they would, as I left the room, short the company. They liked the company, the sector and the prospects (or so they said), but they knew that there were few buyers for the shares (which is why we were talking to them). However, as we left they figured - quite rightly - that they could make more money selling the shares short rather than going long.

Meanwhile any press release saw the share price fall, since everyone presumed that anyone who wanted to buy the shares would know the news and would have factored in the good news (which is totally illegal).

This is why hedge funds are evil. Essentially, they exist to make money in bad times as well as good times by 'managing risk' (what utter bollocks). In fact, they make more money by going short in a long market. If they go short in a bear market they're screwed. Which is why they, first of all, brought down our financial system, and then brought down themselves. 

The result of this financial order, for an industry that was meant to be the 'next great hope' through the 'boom years' of 2005-8 is:











And this is why we're in the mess we're in.

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