The fall of old Gurus

With the exploding stock prices of Internet companies in mind, top CFOs are asking themselves what lessons should be learned from the new economy. Valuation obviously has nothing to do with price-earnings ratios, price-revenue ratios, or short-term profit expectations anymore. Calculations made with the help of proven discounted cash flow methods seem to teach us that the stock prices of most Internet companies will never create sufficient value for the investors. But is this line of reasoning correct?

What we can be sure of is that all the investors who didnt invest in the new economy last year now have the hangover that comes from making the wrong decision. This is just what happened with one of the most famous old gurus, Warren Buffet, and his investment company, Berkshire Hathaway. He openly admitted that he had no understanding of high technology and consequently, last year, he paid the price. B.H. stock quotations tumbled 50% compared with the S&P index; no comment was made about the NASDAQ, which did much better than both the S&P and the Dow Jones. Buffet openly donned the penitential robe. "Even inspector Clouseau could have found last years guilty party: the chairman," he said.

Who loses?

Experts in Silicon Valley argue that in the next years only the expected market position matters. In other words: Is a company in a position to achieve the number one or number two rank in its respective E-Marketplace? Only then it seems, will the company become attractive. But is this a sound argument? Or is this reasoning only part of a short-term hype? The coming years will provide the answer, but should CFOs wait for this? No, of course not, they have to fulfil the expectations of the stock market each quarter. So they are forced to participate in a new gamble that was never part of their job.

In my article: Global business 2000: first innovation and then crisis , I pointed out that we may expect an economic crisis in a few years, and raised this question: Will an economic crisis help the representatives of the old economy? I dont think it will, because even if the crash destroys the reputations of new entrepreneurs and many investors, the new market realities…