The Butler Project

Nate has been a sales manager and sales executive in the technology sector for over two decades and he’s seen a lot. Yesterday he talked about how he saw fast, easy money go to his friends’ and co-workers’ heads and ruin their lives.

In this part of the interview he talks about the sheep mentality that lead to the whole technology bubble in the first place. We got into the discussion when I talked to him about setbacks in his career that had taught him important lessons:

Nate: Anybody in their technology career had a real setback when the bubble burst – that was a really harrowing time for all of us. We were used to everything being ‘up and right’ (on the stock charts), but I think the lesson I learned from that was just the concept of using sound business principles.

Mark: Tell me what you mean by that. What were you seeing in the industry?

Neal: Well, fortunately the company that I worked for wasn’t caught up in doing a lot of vendor financing, basically paying for all these companies to buy your gear, that would then subsequently go out of business. So you’d lose twice because you had to pay for the raw materials to build the gear and then you had to give them the money to buy it.

Mark: I haven’t heard about this. What do you mean by vendor financing?

Nate: A lot of the technology companies would come to the technology vendors during the bubble and they’d say “Listen, I’d like to buy $10,000,000 worth of gear, can you lend me the money to buy it?” And a lot of the vendors were doing it – Cisco, Oracle. And it was called vendor financing. The customers’ credit wasn’t good so the vendor would finance the purchase themselves, and then of course that turned into massive write-offs when the bubble burst because all of those people went out of business.

Mark: Because most of those companies didn’t really even have earnings did they?

Nate: Right, right. Because some business analyst for Morgan Stanley wrote a paper that said all the traditional business models, and business fundamentals weren’t important. That it was all about eyeballs, and it was like a gold rush and whoever got their first was going to win – it didn’t matter if they had any revenues. Everybody bought into it, including the vendors. And that wasn’t the case. You had to have earnings to have a sustainable business.

Mark: And you were saying that your business chose not to buy into that [philosophy].

Nate: Yeah our business fortunately chose not to buy into a lot of that. Our CEO took a very simplistic look at how that [way of running a business] was going to pan out and just said you know I don’t do things like that. It really worked out for us because we were really able to come through the downturn a lot more unscathed than a lot of other people in the industry.

So how does this relate to you and me? Most of us don’t own technology companies, so we probably don’t have to worry about getting caught up in the exact scenario that Nate’s CEO faced almost a decade ago.

I think the principle here is avoiding the mob mentality, the lemming approach to running a business and running your financial situation. The Morgan Stanley analyst that Nate is referring to here is named Mary Meeker. I’ve been doing a lot of reading about her and apparently she was one of the pioneers of the “new business model” based on nothing but usage statistics for websites. I found this excerpt from an article about how ugly the tech bubble really was (referring to Ms. Meeker):

She often rated Internet stocks not just on traditional balance-sheet measurements, but also on something called “usage metrics,” like website page views and estimates on how many “eyeballs” viewed a particular website. Meeker believed such measurements were the best way to assess money-losing but promising Internet companies because they measured possible future performance, although most small investors had no clue what they meant.

Meeker has been blamed for the entire tech bubble and subsequent crash, but I’m not taking it that far. I just think she gave us an opportunity to see this aspect of human behavior on a huge scale.

People are intoxicated with the idea of a quick buck, a gold rush. I’ve fallen pray to it before - sometime I’ll have to post about how my real life education in smart investing cost me $10,000 and a justifiably irate wife.

Even normally rational people can abandon all reason if there are enough people doing it around them. I guess the mortgage mess we’re in now is a good example of that.

The other day a friend of mine was telling me how his friend was trying to get him involved in some racket where they take control of multi-million dollar homes with distressed sellers (through some mortgage and legal gymnastics) and then refinance out a big chunk of the equity, which they use for hard money lending. The guy pitching the idea to my friend actually said this: “Most of the companies doing this are total scams, but I actually found the one company that isn’t.”

Hmm - think so? Later that night I spoke to my best friend, a real estate attorney, about the whole thing. “Yeah, that one is going around right now. Total fraud, multiple felonies involved. I have a client who did a single deal like that and he is going to do time. I’ve had long conversations with both the FBI and the Criminal Division of the IRS about this. There is no “clean” way of doing that deal, so that guy better steer clear or he’s going to prison.”

For the record, the friend-of-a-friend in question doesn’t seem to be a total idiot from what I hear about him. He’s just caught up in the idea of a quick buck, and he seems ready to risk everything chasing it.

Of course, I’m not saying stick your head in the financial sand (as in putting all your money in a savings account earning 2%). I’m saying slow down and use common sense. If someone presents you with an opportunity for earning returns or income way above what’s reasonable for the market, be wary of them. Especially if they say it’s easy. If you’ve followed this site at all, you’ve heard multiple millionaires talk about how they achieved their success - which could be summed up as “work hard and don’t quit”. My advice would be to read their stories, and act like them.