So you get into irrationality.
Yes. And the disconnects are really challenging, because somewhere at the base,
you know that this thing doesn't appear to be worth what the market is paying
for it. If the market pays a ridiculous price for a short period of time and
then comes back down, you pat yourself on the back and say, "I stuck to my
fundamentals, I was right."
But if the market keeps going and going and going, you have to question whether
you are right or whether the market's right. And the law of averages by far
favors the market being right, particularly when there is a new technology. As
we had talked about before, Graham and Dodd wrote the book on securities
analysis, a big honkin' tiny print, pain-in-the-neck book of math. And I went
back to that book when I was sort of flailing about trying to figure out how
this disconnect could happen.
They have a great line, or a great couple of lines that say, in a nutshell --
I'm not quoting -- that there are periods of time when there are new
technologies and new fields of endeavor where an analyst basically serves his
or her discipline best by pointing out those companies that seem to have the
And the analyst's job at that point is to mention, to make sure that investors
understand that, while they can reap rich rewards from putting money into those
securities, it is very much -- and this is their word -- in an "odds-making,"
as opposed to an investment environment. There are periods of time when you can
play the slots, when you can gamble on these stocks, and you will do very well;
but understand that it's a gamble, and they go both ways. ...
I don't think most people understand what an investment banking house does.
It does a lot of stuff, is part of the answer. Different people have different
roles. [There are] two sets of clients. The first clients are investors. But
for at least [Credit Suisse First Boston] or [Deutsche Morgan Grenfell
Technology Group], the investors weren't individuals; it was the big mutual
funds. It was Fidelity and T. Rowe Price and Putnam and that group.
So part of the job of an investment bank is to enable trades, to enable those
folks to be able to buy and sell stocks efficiently in two ways. One, because
we make markets, we literally have people buying and selling stock all day
long: "You, Putnam, want to sell this. You, T. Rowe, want to buy that. Hey, we
can work that out."
But the second thing that investment banks do on that side is they provide
information. When you are with a Putnam or a Fidelity, chances are the analysts
are each looking at a hundred or more stocks, which is great -- they want to
understand the entire industry. But if you're looking at a hundred companies on
a constant basis, you're not getting the detail. So investment banks pay for
analysts who basically say, "Look, I'm doing nothing but looking at PC
hardware, somebody else is PC software, somebody else is printing. I'm just
going to spend all of my time studying what's going on in this business,
private companies and public companies, to understand what are the changes
happening. And I'm going to try to feed that information to you, the
institutional investor, so that you can make more informed buy and sell
decisions for your portfolio."
That's half of the business. The second group of clients are those who are the
private companies or the public companies we will provide banking services for
What does that mean? If you're private, we'll help you raise money, either by
calling on a network of private company investors that we know, or by taking
your company public, by going through all of the long and involved process that
is required to take a company public, to put it in individual shareholders'
hands. If you're already public and you need to raise more money, we'll do a
secondary, another offering of stock after you're initially out there. Are you
interested in buying another company? We'll handle all the details of merger
and acquisition transactions. ...
You were an analyst. What was your specialty?
Prior to coming out West, I had been looking at desktop technology -- hardware,
software, distribution, peripherals, that whole group. But it became apparent
to me in 1996, 1997, that the Internet was going to be something that was not a
flash in the pan. It was going to be something big and different and was
fundamentally going to change the way we all do most of the stuff that we do --
which is something I still believe today.
So when I came out here, I narrowed my focus to only looking at, quote,
Internet companies. Now today, saying, "I'm looking at Internet companies,
that's a narrow focus," is ridiculous. But at the time, the number of corporate
organizations either using the Internet to build a business or using it to
change the business they were already in was tiny. So I came out to try to
understand how is it this piece of technology we have, this tool, is going to
How many stocks were you covering when you were there?
Oh, gosh, in the beginning I probably had six -- Amazon, CNET, Yahoo, Excite --
all companies that institutional investors did not want to talk about in 1997.
And then I picked up two "real companies." I put that in quotes, because that's
the way the institutions looked at them at the time -- Electronic Arts and
Intuit -- both companies that had very solid fundamental businesses, revenues,
profits, et cetera, but that were also looking at the Internet to see how they
could really change what they were doing.
And those were the only two companies that people wanted to talk about in the
beginning. Then eventually I picked up the other names as investors started to
care more about them, America Online and Lycos. By the end, I think I had,
gosh, 18 or 19 companies under coverage.
Only 18 or 19? That's not too big of a portfolio?
It is too big of a portfolio. It's definitely too big. But it was certainly a
lot smaller than many folks at many other investment banks. The question is,
how many companies can you really accurately track every day, if you realize
that you're spending half your time out of town visiting the institutional
clients? It doesn't do me any good if I know everything there is to know about
the entertainment software business and I keep it to myself. ...
And you're also issuing public reports and going on television?
You're also issuing public reports in lots of occasions. If you are the
investment banker for a company, I think it's 30 days, or 25 days after the
company goes public, your obligation is to put out a research report saying,
"Here's what this company does, here's how I valued it, here's what I think of
Additionally, not less than once a quarter, when the company has earnings, your
job is to write up a little note saying, "Here's what they announced, here's
what it means, here's how I translate what they told us."
Whenever a company makes a major announcement about something, put out a note.
And notes can literally be a page or maybe two pages, but they say, "Here's the
piece of news, here's why I think it matters." These are enormously important
to the institutions.
It's how they get their information on a real-time basis. Think of all of the
institutions who follow Microsoft. If Microsoft's investor relations department
had to individually answer calls from every institutional investor out there
who owned the stock every time there was a little announcement, it wouldn't be
physically possible. They'd have to employ a hundred people to just answer the
So the analyst community, again, becomes the mouthpiece to say, "Here's what I
heard, here's what they said, here are the facts, now here is my
interpretation." You, the institutional investor, are getting that information
from the analysts at the time -- Goldman Sachs, CS First Boston, Morgan Stanley
-- you're getting 15 of those. You, the institutional investor, over time,
figure out which analysts you're most comfortable listening to, and whose
opinions you don't agree with quite as much.
There's also a reverse pressure on you?
It depends on the occasion. I guess there's two answers to that question. When
there's a piece of news and you need to say what it means, you pretty much say
what it means.
If your investment bank -- remember, we talked about the two sides of the
business -- if your bankers have arranged a merger between two companies and
have issued what's called "the fairness opinion," the legal document that says
we think this company's paying the right amount for that company, if your bank
has been intimately involved in the transaction, you as the analysts are not
going to come out and say, "Oh, how stupid." Right, you cannot do that.
Hopefully, there would have been a dialogue internally long before the merger
happened; not specifically, because as analysts you really don't know what
M&A stuff is going on. But hopefully the bank has a sense that you won't
find it an incredibly stupid idea.
But there is certainly a pressure there. And yes, if your firm has done banking
work for a client, whether it's on the mergers and acquisitions side, or
whether it's taking it public, the analyst is -- it's understood that the
analyst is not going to come out and say, "Bad idea, stay away from this."
The facts are the analyst is under pressure to say it's a good idea.
Well, the answer there is, "Yes, but." Analysts are kept in the dark about
mergers, because that's inside information; we shouldn't know it. But in terms
of an IPO, there's a lot of conversation that goes on ahead of time.
And I can't say this happens at every bank, but I can certainly say it happens
at the top tier banks: If the analyst thinks it's a really crummy idea, the
analyst had better say so early on. "I will not take that company public, I
will not put my name on a report that endorses that company, because I don't
think that company is going to work."
Examples of that?
There are plenty of them, but it does no good to kick anybody when they're
down. So, yes, there are specific examples where companies came in and wanted
CSFB to take them public. The bankers were content to take them public, because
their job is to just bring them to the analyst. And the analyst said, "Not that
one, not doing that."
I'll give you an example that's been in print. Mary Meeker [at Morgan Stanley]
is famous for having said that when she looked at Yahoo in the beginning, she
didn't see a business there, and she turned it down -- and good for her. The
business didn't look so solid at the time. ...
On one hand, everybody cares about a quality reputation. On the other hand,
bankers pay a lot of attention to something called the league tables, which
measure who raised how much money during the course of a year -- because
everybody wants to go out and say we raised more money than everybody else did.
So the bankers -- while, again, everyone has a certain quality threshold --
bankers at some level are much more concerned about quantity of transactions,
assuming that it is the analyst who will do the quality filter.
And at some banks, it is much easier to put that quality filter on than it is
at others. At the end of the day, if I screamed and yelled and had a tantrum
about a company I just wasn't going to work with, the bankers would defer to
the analysts. But there was always that tension.
So during the bubble is the time you're asked to look at Petopia. Is that an
There were so many deals that went through during 1999 and 2000. And the
hardest part for both sides, for bankers and analysts was that a lot of
companies that looked like there was no there there were getting out into the
marketplace and going to the moon.
The one that's become the poster child now is theglobe.com. In my opinion,
there was never a business there. And we flat-out would have turned that deal
down, had they come to us. But then we would have looked like idiots for three
years, because the stock not only had the hottest one-day move of any company
that had ever gone public; it came out the door and it traded just fine for
And in the middle of that environment, when you keep saying no and the stocks
you keep saying no to keep shooting out the door and heading up, it gets back
to the issue of who's wrong, me or the market. ...
So market momentum had a way of weeding out anybody who was not a
Yes, yes, that is exactly correct. And momentum superceded analytical work. It
became a market, and this was one of the things that troubled me over time,
some of the bigger stars were cheerleaders, not analysts. It was no longer
about who was doing the best analysis, because the best analysis got you
nowhere. It was who was being the best cheerleader for those companies. And
that's problematic; that's troublesome.
Especially when you have a public market.
Oh, let's not underestimate where the retail investors were at this point. You
put out a note that was even moderately cautious about a stock, and you got a
flood of hate mail. It's fine to stand up now and say, "Oh, those poor retail
investors who got hurt here." But the retail investors were going ballistic
that you weren't cheerleading their stocks every which way.
Every once in a while you'd go look in the chat rooms -- a bad thing to do, but
it was kind of amusing -- to see what are people saying. And you'd just see
thousands of posts about what an idiot you were because you didn't love their
Or remember all the press about IPO pricing. Companies' IPO price would be $14
a share. Stock would trade to $80 a share, and there was this, "Oh, what are
those horrible bankers and analysts doing, they're pricing it at 14, they're
giving gifts to the institutional investors."
What if they were pricing at 14 because, despite of where they knew demand was,
they thought it was worth 14? What if that was as high a price as you could
possibly get? Could you get to 15? Sure you could. There's always some
flexibility with something that new. But there was no way in hell these things
were worth $50, $60, $80, $100 more. But we have a free market, and if people
want to pay that much for them, we can't stop them.
It was fascinating, all the abuse that we took for trying to keep some rational
basis in the initial prices.
Do you remember any of that abuse in particular?
... Frankly, we found a fascinating change when we'd go to pitch a deal -- when
the investment bank goes to company XYZ and says, "Please let us take you
public, we'll do a better job than anybody else will." When we first went out
there, we took these little charts saying here's where we price stocks, and at
the end of the first day, they're up 20 percent; at the end of six months
they're up 37 percent. And that was a "slow and steady wins the race" that was
And suddenly we go into meetings and one of our competitors in particular would
show these charts that said our first day pops are bigger than anyone else's,
they go up 77 percent on average the first day. We were pretty shell-shocked by
that, because if you thought about it, what that meant is we really mispriced
the stock, or we really hyped the market. It had never been a good thing to
have this one-day gigantic event.
I'm not blaming anyone here. But enter the media, who put those stock moves on
the front page. And suddenly companies started believing that a big first day
pop was a great marketing event. So they really wanted that.
So whereas in the past companies going public had always generally tried to
raise as much money as they possibly could while still leaving something "on
the table" for investors who were willing to stomach the risk of an unproven
stock, suddenly it became, we don't care, take the thing out at 10, and let's
see if we can get it to 93, because we'll be on the front page of The New
So who's guiding them in this?
Oh, the company's reading the paper too. I mean, nobody who was paying
attention to any aspect of the financial markets or the news could have missed
this. So the company has its thought process.
I can't speak for how it worked with others. We would always walk through the
process with them and say, "Look, you're the company. It's your business. Our
job is to execute. But let us give you our opinions, there are several ways to
do this. One, you can go for the slow and steady wins the race that has always
worked. Two, if you guys really want that marketing pop, you want to price the
thing at 12 and have it open at 60. We can't tell you not to do it. We can tell
you that historically that's a little funky, but it's your business, and you
and your investors, your private investors, your venture capitalists, have to
make the decisions that you think are best for your company. We'll give you
advice, but it's your decision." ...
And yes, there were lots of companies that said, "Go for the branding event."
You also do television. What's that?
That was something that just popped up during the last couple of years. ... As
this whole technology stock phenomenon became a bigger news story, I'd spend
more time talking to all of the outlets.
And particularly the dedicated channels, the CNNs and the CNBCs would say,
"Gee, we know AOL is going to announce their earnings this afternoon, can you
come give us a few comments on them?" And so I'd drive over to the studio or
they'd show up in the office and ask a couple questions and go on your merry
It's really the time that they have to fill.
These were hot stories. Suddenly your next-door neighbor who'd been your
next-door neighbor for 20 years is now moving up to the newest $3 million house
because he happened to have sat next to somebody from eBay at a wedding and
bought the stock the first day it was public. And there were all of these
amazing stories of just random individuals who were literally getting quite
rich quite quick.
So it was a big story. It's really changed the economy in lots of ways, not
just out here.
I guess there's also the perception that these programs became competitive.
And you became a part of that. Was there a point at which you became aware of
Well, yes, as you said, we were the filler. They needed to have something on
the screen, and so they'd talk to various analysts. One of the difficult things
is that analysts were very used to conveying their information in these written
notes. And of course we would use technology and emailed them out, but it was
still -- you had a couple of paragraphs: "Here's what they said, here's my
interpretation, and here's a bunch of caveats, here's all the reasons why. Hey
look, it's a stock; it's risky."
But of course, on television, you got a minute and a half. And you have a
question. And so you answer the question directly. But there's no place for the
caveat. You don't get the risk factors. So unfortunately, it became "Headline
News" versus The New York Times.
Those were very different stories and very different ways to convey
information. Something gets lost in the translation, and that is a really
unfortunate aspect of what happened over the last couple of years, although
hopefully we all learned from it.
And the involvement of your bank in the particular stock was not always
Right, right. And that also was important. You know, you put a camera in front
of an analyst and ask him about a stock that they were instrumental in helping
take public, odds are good they're not going to say, "Oh, by the way, we did
the banking here." They're just going to answer questions directly and
honestly. But it would have been [in] the research notes that we write -- there
are caveats all over the bottom that say we took this company public.
Disclosures that are right there, can't miss them. Sometimes they're right at
the very top, and you list the stock price, the price, and then the
disclosures, we're the banker. And the audience that we were used to dealing
with -- which, again, was the institutional investors -- they knew. And they
knew that if you said, "Yes, this is a long-term buy for very risk-tolerant
investors," if you use a sentence like that in writing about a company you took
public, they knew how to read that, which was "Pretty darn speculative, take
your chances, but be careful." ...
Unfortunately, when you take the "Headline News" approach, you just see CS
First Boston says, "Buy," and you miss all of the underlying background
You miss the caveats.
Yes. So is there anyone to blame for this stuff? No, it's that the media was
learning how to deal with us, and we were learning how to deal with the media.
Nobody had been through this before.
And I think if this happens again -- inevitably, parts of it will -- I think
the media will be more savvy about saying, "Here's so and so, they represent
the bank that took the company public." And I think the analysts will be more
savvy about recognizing who's on the receiving end of that information.
Do you feel the public got suckered into this?
No. Are there really difficult individual cases? Yes, there are. But nobody
ever bought a stock who didn't have to sign a long disclosure statement first.
Whether they read it or not is different. But stocks are, by nature, risky. If
you don't want risk, stay out of the stock market; buy bonds, that's what
they're for. ...
Are there certainly some really sad incidences of people who didn't read or
believe the risk statements and saw frenzy and saw some analyst on television
saying "Buy," and they just naively went out and bought? Yes. Did people get
hurt? Yes, they did. But was there this vast conspiracy of the investment banks
and the venture capitalists or the companies themselves? No.
In fact, in the beginning, as I mentioned at the start of all this, it was the
individual investors who were buying all these little Internet startups. The
institutions were nowhere to be found. To us, it didn't make any sense, but the
stocks kept going up. And if you looked at the shareholder base of even
companies as big as Yahoo, much less all of the little [other ones] that were
just popping up, they were owned 90 percent by individuals who were getting
their facts from chat rooms and neighbors and conversations like that.
The critics will say you as professionals had our trust and abused it.
When things go wrong, it's important to have someone to blame. I would not
disagree at all that there were some analysts saying crazy things. And
absolutely everybody made some mistakes, because none of us had been through an
environment like this before.
Do you think you said crazy things?
Oh, I think I made mistakes. By "crazy things," what I really mean is the
people who made up these ridiculous price targets, "Oh, this stock's going to
trade for $2,000 a share because I think it should." That, to me, is
And I don't think I ever did anything like that. In fact, that quote that I
tossed out before about, hey, look, it's speculative -- I put that in writing
in everything I wrote: "Look, sucker's going up, you might make money owning
this, but understand that the fundamentals don't correlate the stock's price.
And someday that will matter. But I didn't have any idea when." ...
So it's not the media's fault, it's not the analysts' fault, it's not the
investor's fault. We were in this period where stocks stopped making sense.
But can something really go wrong this big and be nobody's fault?
Or is it everybody's fault? Shoot, where do we really point the finger? Human
nature and greed. Everybody thought they could get rich quick. For everybody,
across from retail investors to investment banks, there was this period where
money was growing on trees, which is totally cool, while it's going on. But you
know it's not going to last.
But what made this so difficult was it lasted much longer than any of us had
any reason to think. We'd seen little blips before, but nothing like this. And
when it keeps going on and on and on, and it's based on some new technology
that does change the way we communicate with each other, and you say, "Shoot,
the phone really changed stuff, the phone made a huge difference in the way
business is run. Maybe this is the telephone all over again. But instead of
taking a hundred years to recognize the benefits, we're just going to recognize
it all up front."
It was not a totally irrational thought process in that environment. ...
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