The title refers to the book written about Nortel called The Bubble and the Bear by Douglas Hunter, Doubleday, Toronto, 2002. Nortel for those who do not remember was once one of the high flying companies that was linking the world as the internet became common to everyone. In an earlier time, it was similar to linking all the countries by the railroad. Similar to the railroads, millions of dollars of raised to build the railroads, and many were built. The difference between building and operating profitably is the reason why you can count the number of railroads that exist of two hands. In the railroad age, the railroads were given the understanding by the government they would back them up, for without a railroad, your economy went downhill. In addition to this understanding of a guarantee, the rates of interest were higher than other investments and millions of dollars went to buy railroad stocks and bonds.

In Nortel’s case since the invention of the telephone, there was a very specific method to deliver the voice over the wires. The system had not changed in over 100 years and the companies that delivered the service were large and profitable. The shareholders who owned included the term orphans and widows which meant at least in your financial life there was stability. With the advent of the internet, a new method had to be invented, invested to deliver data. At the same time, communication was changing from land lines to cell phones. Whatever company set the standard and the world or major service providers accepted, the company has a major advantage over its competitors. When there is a major advantage, the growth will be great. At some point it will level out and consolidation among the competitors happen. Those that relied on cash flow – have clients that pay on time will in the end survive. All of this is easy to see while looking back on the sector, what is remarkably harder is predicting the right choices. For a long time, the right choice was Nortel which had evolved to build an optical system which could move significant amounts of data and voice. It seemingly had the right customers – most of the world’s best telephone companies who were transforming to internet companies and growth rates which allowed the ability to make money on the stock wonderfully easy.

Then something happened when downturns happen, Nortel which was seen as a growth company instead of growing at 40% a year only grew at 5% which meant the stock was overvalued. If you are investing for capital gains, growth is great and you are willing to pay higher multiples for the growth. If you are investing for dividends, then growth is desirable, but sustainable in order to protect your profitability and be able to pay the dividends. You are willing to pay considerably lower multiples for dividend paying stocks. As the stock was seen less as a growth stock the price fell. However when the price was high, Nortel was using its stock to buy other companies in order to grow. As the price went down, this strategy was no longer a good one. In addition, what was thought as a wonderful customer base turned out not to be so for WorldCom and others did not survive and Nortel’s accounts receivable went upwards. In addition, prior to the decline in tech stocks in general, companies such as Nortel when customers could not pay, the companies took stock instead. When the stock markets were desiring as many tech stocks as possible and bidding prices up, this was a wise decision. When the markets were down, the stock prices went down and soon not only receivable rising, but values of holdings were rapidly decreasing. Many things happened seemingly all at once and Nortel was a stock not worth owning.

Linking to dividend paying stocks, Nortel was a dividend paying stock until in went bust, in all likelihood it should have stopped paying dividends as the company was losing money but the sector was hot. One lesson to learn is if you own a dividend paying stock and the sector becomes hot and starts to operate like a growth sector, take some profits and move your money to a non hot sector. With the remaining stock let it ride till you see the signs the hot market is over and get out with more profits. Move those profits to a sector which is profitable but not seen as a growth area.

There are more questions than answers, till the next time – to raising questions