The New Economy

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

In the 60s the notion: "income is all" was generally accepted by
economists.  Then the notion was replaced by "money matters."  For the
past decade, the market has been quietly adopted a new strategy based
solely on capital gain. Income, afterall, was not important.  Dvidend
return dropped from the norm of 5% to 1.5%.  Many blue chips even
suspended dividends in favor of higher share prices or stock splits.
The cost of money also seems irrelevant, as Greenspan, his red face
disguised by straight face, repeated issues profound statements to
explain why the Fed has become a side show as far as Wall Street is
concerned.
It seems now the only operative investment strategy is to shoot for
capital gain by buying into growth.  If the investor needs money, sell
some growth shares and be taxed at the lower capital gain rate.
Evrybody's pension is now tied to growth investment. Even widows and
orphans are advised by their trust fund finance planners to put their
money in growth funds and forget about fixed income or dividend income.
Better yet, borrowed against shares of rising value and hedge it so that
the worse that could happen is to forego anticipated appreciation but
still capture 100% gain for original investment.  The hedge is updated
every six months.

As for entrprenneurs on startups, here is the standard formula that has
been operative for the past 4 years.  Start with a $300,000 intial
investment, either from angles or friends and relatives, each putting in
say $5,000 to $50,000. in exchange for a cummulative 10% of the share.
The company is then valued at $3 million.  Twenty year old college
dropouts are now Chairman and CEO of $3 million startups.
Three months later, executive a first round funding by  selling another
10% for $3 million to a venture capital source. The company then has a
market capitalization value of $30 million.  Second round fund fund a
year later brings in $30 million for another 10%.  The company now has a
market cpaitalization valued at $300 million.  IPO a year later, selling
another 5% for 150 million, with a capitalizaed value of $3 billion.
Meanwhile the companied had a ccumulative negative cash flow of $100
million in less than two years.
35% of the company is now in public hands, with 50% distributed to
founders and early management and employees.  Another 15% is held as a
strategic war chest worth $450 million at IPO and possible seveeral
billions dollars with a bit of luck and much hype, enough to buy a brand
name in the old economy.  Meanwhile, the founders and early investors
will hedge part of their holdings with their friendly bankers at second
round valuation.

The general message of the White House Conference on the New Economy
yesterday was that this is only the beginning.  The joy ride will go on
forever.

Henry C.K. Liu