A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

New Valuation Metrics
In order to justify ever higher prices for Internet-related
companies, security analysts began to use a variety of “new
metrics” that could be used to value the stocks. After all, the

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New Economy stocks were a breed apart—they should
certainly not be held to the fuddy-duddy old-fashioned
standards such as price-earnings multiples that had been used
to value traditional old-economy companies.
Somehow, in the brave new Internet world, sales,
revenues, and profits were irrelevant. In order to value
Internet companies, analysts looked instead at “eyeballs”—
the number of people viewing a Web page or “visiting” a Web
site. Particularly important were numbers of “engaged
shoppers”—those who spent at least three minutes on a Web
site. Mary Meeker gushed enthusiastically about
Drugstore.com because 48 percent of the eyeballs viewing the
site were “engaged shoppers.” No one cared whether the
engaged shopper ever forked over any greenbacks. Sales were
so old-fashioned. Drugstore.com hit $67.50 during the height
of the bubble of 2000. A year later, when eyeballs started
looking at profits, it was a “penny” stock.
“Mind share” was another popular nonfinancial metric
that convinced me that investors had lost their collective
minds. For example, online home seller Homestore.com was
highly recommended in October 2000 by Morgan Stanley
because 72 percent of all the time spent by Internet users on

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real estate Web sites was spent on properties listed by
Homestore.com. But “mind share” did not lead Internet users
to make up their minds to buy the properties listed and did
not prevent Homestore.com from falling 99 percent from its
high during 2001.
Special metrics were established for telecom companies.
Security analysts clambered into tunnels to count the miles of
fiber-optic cable in the ground rather than examining the tiny
fraction that was actually lit up with traffic. Each telecom
company borrowed money with abandon and enough fiber
was laid to circle the earth 1,500 times. As a sign of the times,
the telecom and Internet service provider PSI Net (now
bankrupt) put its name on the Baltimore Ravens’ football
field. As the prices of telecom stocks continued to skyrocket
well past any normal valuation standards, security analysts
did what they often do—they just lowered their standards.
The ease with which telecoms could raise money from
Wall Street led to massive oversupply—too much long-
distance fiber-optic cable, too many computers, and too
many telecom companies. In 2002, mighty WorldCom
declared bankruptcy. And the big equipment companies such
as Lucent and Nortel, which had engaged in risky vendor

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financing deals, suffered staggering losses. Most of the trillion
dollars thrown into telecom investments during the bubble
has vaporized. One of the jokes making the rounds of the
Internet in 2001 went as follows:
Tip of the Week
If you bought $1,000 worth of Nortel stock one year
ago, it would now be worth $49.
If you bought $1,000 worth of Budweiser (the beer,
not the stock) one year ago, drank all the beer, and
traded in the cans for the nickel deposit, you would have
$79.
My advice to you…start drinking heavily.
By the fall of 2002, the $1,000 put into Nortel stock was
worth only $3.