For a while, becoming fabulously wealthy practically overnight seemed to be
about as easy as waking up in the morning and getting out of bed. That’s the
way it was for Jon Simmons of California, who turned a measly $4,500 into $2.2
million in just 13 months by investing in Internet and other tech stocks. When
he hit the $1 million mark early last year, he quit his job as a computer
programmer and concentrated on trading.
Two months later, when his stocks had more than doubled, the 31-year-old
began to fantasize about buying his dream home–just as soon as he doubled his
money again. He never got the chance. Within days, the tech stock bubble burst
and, after paying his taxes on earlier gains, Simmons was left with just
$100,000. His wild rise and sudden fall left him dazed. Often, he had to remind
himself: "It was just money."
Maybe for him. But many investors have lost a lot more than paper profits
during this long and seemingly bottomless slide. A year after the peak of the
Internet-driven stock frenzy, what one psychologist calls "the fear-greed
roller coaster" has drained bank accounts, delayed retirements, pulled
marriages apart–and worse. A New York couple, who suffered enormous losses
through day trading, entered into a murder-suicide pact last fall. George
Schavran, 70, shot 42-year-old Catherine Fischer and the couple’s German
shepherd, Graf, on a desolate Long Island beach. He survived his suicide attempt
and now faces a murder charge.
Only now is the full extent of the damage to personal finances and people’s
lives becoming clear. Since the market’s peak, $4.6 trillion of investor
wealth has vanished. In just one year, the number of millionaires plummeted more
than 10%, from 7.1 million to 6.3 million, according to the Spectrem Group, a
Chicago-based consultancy. If that wasn’t enough, many people are being forced
to pay taxes on capital gains they no longer have. They sold stocks near the
peak and reinvested in others as the market was sliding to new lows.
The rapid swing between instant wealth and financial worry produced emotional
whiplash. The thrill of counting out Nasdaq profits has been replaced with
bitter hours of fear and self-blame. For some, Investors are grieving–passing
through stages of denial, anger, and depression. The sad reality, psychologists
say, is that the pain of losing money is far stronger than the pleasure of
making it.
Uncertainty principle
People need to learn to cope with such feelings or they could end up
compounding their problems. Seeking help from therapists and financial advisers
can keep things from getting worse.
The hurt isn’t limited to individuals. A sharp drop in consumer confidence
has contributed to the steep downturn in the economy, and seems likely to affect
investing for months, maybe years, to come. Without a belief that stocks will
achieve even pre-frenzy returns, investors won’t likely place bets that could
help produce those returns for everybody. Instead of a virtuous circle, the
pattern of positive reinforcement is broken–replaced by fear, uncertainty, and
mounting financial losses.
The allure of Wall Street was hard to resist–and practically everybody who
could scrape together a handful of savings gave stocks a try. By the end of
1999, nearly 80 million Americans owned stock, compared with 42.4 million in
1983, according to the Investment Company Institute. Getting rich quick was no
longer just the stuff of Super Lotto dreams. Thanks to tech stocks and the
seemingly limitless promise of the Internet, it looked like the old rules had
been suspended and any schmo could become wealthy. Indeed, Spectrem says, there
were 3 million more American millionaires in 1999 than in 1995.
The ride was dizzying–both up and down. Take DuBrow, the limousine company
owner. At one point, DuBrow, 62, was nearly a millionaire, having watched his
$100,000-plus bet on Net and tech stocks skyrocket 800%. He became addicted to
the market. He started talking to his broker five times a day and became glued
to CNBC. For a while, his obsession made him feel great. "I began to feel
like a guru," he says. He would talk excitedly to friends about his latest
successes. On his best day, he was up more than $45,000.
When the market declined, his confidence evaporated. For the first time in
his six-year marriage, he hurt his wife, Anita, grabbing her arms and shaking
her briefly when he lost his temper. Normally, she says, "He’s such a
gentle person. It scared me half to death to see him change that much."
Sounding despondent in early March, DuBrow talked about going cold turkey and
selling everything. Just days later, his mood had swung to the other extreme. He
was convinced that the market had hit bottom and could only go up from there–and
he was buying again.
The meltdown market was especially jarring for people who worked for dot-coms.
Often they were hit by a double whammy: trying to deal with the shock of instant
wealth, and then, just as they were preparing for their new life, watching their
money vanish. One 28-year-old Yahoo! executive who had spent two years searching
for the perfect mansion not only bought his $2.5 million house but also paid his
taxes with margin loans, says Pat Ingraham, a Century 21 real estate agent in
California. When Yahoo’s stock began to collapse, the man was forced to sell
the house before he moved in.
Some tech workers are winding up with huge tax bills and little money to pay
them. Fran Maier, 38, former senior vice-president of marketing at women.com
in California, exercised more than 60,000 stock options when they were worth $6
a share, up from her grant price of 80 cents a share. Maier had to pay taxes on
the gain in 1999, even though she hadn’t sold her shares. In fact, she was
barred by law from selling them for six months, but by that time they were
sinking. To get enough money to pay her taxes, she had to sell shares at $3 each
and take a second mortgage on her home.
Such financial ups and downs take a heavy toll on families. When Maier’s
son was asked by his fifth-grade teacher to write an essay about what he’d do
with $1 million, he wrote that he’d give some money to his mother so she could
pay her taxes. It gets worse. A California woman who asked to go only by her
first name, Mary, says sudden wealth ruined both her marriage and her financial
dreams. Her family’s assets had skyrocketed by $25 million overnight when her
husband’s tech company was bought by another one with a high-flying stock
price and he received a large grant of shares. Three months later, Mary was
shocked when her husband took her out to lunch and announced he wanted a
divorce. She believes he saw his newfound wealth as the opportunity to lead the
life of a rich playboy. While the marriage fell apart, the stock price did too,
tumbling from a high of $250 to $53 a share before she sold.
By Rochelle Sharpe in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc
Size matters
Mini-dots do it right |
Small businesses use far different strategies from the venture-funded dot-coms. That has helped them thrive on the Web, where their bigger forebears went bust. Here’s how: |
STAY STINGY Small fry know how to use the Web to stretch a buck. Carrie Hardy, founder of scrapbook supplier Scrappin’ Happy, frequently e-mails offers to her 1,100 customers–at zero cost–instead of taking out $80 ads in trade magazines. She says her business, which grossed $52,000 last year, will grow 25% this year. FOCUS FOCUS FOCUS TAP INTO NEW MARKETING CHANNELS USE THE BUDDY SYSTEM PUMP UP THE SERVICE |
Now, these mini-dots are proving they’re an online force to be reckoned
with. Indeed, they’re teaching their bigger rivals a thing or two–including
the value of common sense. Unlike some dot-coms with inexperienced executives,
the mini-dots are succeeding by employing the same strategies that
small-business owners have relied on for centuries: They’re sticking to niches
they know well. They scrimp on expenses, forgoing expensive portal deals and
using Net resources, from e-mail to customer-sharing arrangements, to save
money. And they’re banding together on the Web, presenting a bigger face to
the online world.
So far, it seems to be working–so well that small businesses appear poised
to play a greater role in the growth of e-commerce than anyone expected. Small
companies will see their online sales grow 336% from 2000, to $120 billion by
the end of 2002, predicts ami-Partners, a New York consultant to small and
medium-size businesses. That will outpace overall e-commerce revenue growth of
249%.
Of course, size matters, even in the New Economy. But in some crucial ways,
the Net helps level the playing field for small outfits. For one thing, the cost
savings of selling online and dispensing with store rents or direct-mail costs
makes some businesses viable that otherwise wouldn’t be–say, a home-based
collectibles business.
Moreover, the global nature of the Web goes a long way toward negating one
key disadvantage of the small fry: geographic reach. Now, even a niche seller of
specialty pet supplies can amass enough customers to be viable. Finally, the
easy communications afforded by the Net may make more small businesses,
especially services such as graphic design, attractive to larger businesses
seeking to outsource jobs.
The impact of a mini-dot explosion could have big implications beyond the
Web. By 2004, even the tiniest of these e-merchants–those with fewer than 10
employees and $3 million in annual sales–could account for as much as 10% of
the US gross domestic product, according to e-commerce researcher Keenan Vision.
Maybe so, but big questions remain about how much the Net will boost the
number of small businesses and what impact they’ll truly have on the economy.
For one thing, says William Dunkelberg, chief economist for the National
Federation of Independent Business, it’s possible the Net is simply shifting
existing sales online, not expanding markets enough to support many new
businesses. He adds, it’s likely that the most successful online businesses
will put the other mom-and-pops out of business, lessening the net gain. Most
traditional small businesses fail, and the same may well be true online.
And for all its advantages, the Internet presents a lot of challenges to the
little guys, too. In many parts of the country, pokey Net connections limit how
many visitors these sites can handle. And it can be tough for traditional
businesses coming online to handle both channels at once. Those factors may
explain why, for all the small businesses that have launched online, many more
have not yet moved beyond sites that are nothing more than online brochures.
According to ami-Partners, 22% of small businesses had Web sites in 2000, but
only 8% were engaging in e-commerce.
Still, none of these challenges has stopped a growing number of small
businesses from embracing the Web as a new sales channel and productivity tool.
Many of the online newbies are longtime Main Street merchants or
industrial-goods manufacturers. There’s also a raft of service providers–computer
programmers, graphic designers, lawyers, and such–who have left Corporate
America to hang a shingle on the Internet.
The Web is spawning new breeds of small companies, too. They include tens of
thousands of people who never ran a business before but now make a living
selling collectible ornaments, antique toys, and other odds and ends on sites
such as eBay. About 13,000 stores have sprouted on the Yahoo! Stores section
alone since June, 1998.
What these disparate businesses have discovered is that the Net is less a
magic carpet to a newfound land of riches than a tool to turbocharge an already
sound business model. "The Internet is what the telephone was when it was
invented–a way to further our reach," says Wendy Haig, founder of
Washington (DC)-based Global Strategy, which counsels troubled dot-coms.
"With its vast reach, the Internet will enhance any small business that
uses it properly."
How so? First, they’re using the Net’s access to a global customer base
to zero in on defensible niches, instead of offering all things to all Web
surfers. Pets.com, for instance, went bust in December partly because it tried
to sell all kinds of pet supplies–even huge bags of inexpensive dog food with
high shipping costs and margins under 10%. By contrast, Massachusetts based
Waggin’ Tails sells scarce items such as Provi-Tabs dog vitamins and Hi-Tor
prescription cat food. That allows the Web store to charge high enough prices to
turn a 30% profit margin on well under $5 million in annual sales.
In some cases, the Web’s global reach has allowed entrepreneurs to offer
entirely new types of narrowly focused services. Patti Glick, a San Francisco
nurse trained in podiatry, makes a living speaking at companies on foot health
and safety. Before, she had to do a lot of personal networking, such as mingling
at Toastmasters meetings. Now, by participating in various online podiatric
sites and women’s portals, Glick has drawn corporate customers intrigued by
her screen name, "footnurse." She expects to earn $30,000 this year
working part-time hours that allow her to spend time with her 10-year-old twins.
Small businesses also are using the Net to save big bucks–enough, in many
cases, to make a pipe dream a going business. Selling Beanie Babies and other
collectibles online out of a bedroom in his Oklahoma home, Perry Calton is
grossing annual sales in the low six figures.
Besides saving money, the Net also provides mini-dots a wealth of new
marketing channels. E-mail and discussion newsgroups can be far less expensive
and more effective than direct mail and print or TV advertising. Carrie Hardy,
founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends
newsletters to 1,100 past customers and posts messages on scrapbooking
newsgroups. Instead of buying $80, three-line ads in trade magazines that never
drove any traffic anyway, she spends nothing and gets a far better response:
After mailing her February newsletter, sales doubled the next day.
No online marketing channel has proved more effective than online auctions,
pioneered by eBay in 1996. Besides spurring the formation of thousands of new
small businesses online, they have prompted existing businesses to branch out.
Some wholesalers are using eBay to go retail:
Andrew Waites took his Mississippi retail overstock business, Inventory
Procurement Services, directly to consumers over eBay–leading to what he hopes
will be a twofold-plus jump in sales this year, to $7 million, and a gross
profit margin online of 50%, 10 times the original business.
Finally, the Net has allowed far-flung small businesses to gang up and pool
their resources against their bigger and louder competition in ways they can’t
do in the physical world. The American Booksellers Association, which promotes
independent bookstores, runs a program called BookSense.com that allows members
to offer amenities only big chains could offer before, such as gift certificates
good at any member store. Moreover, their online customers can order any book in
print from their site, even if they don’t stock it themselves. Kerry Slattery,
owner of Skylight Books in Los Angeles, partly credits the program for a
higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.
Daunting prospect
All that’s not to say the Web can turn any small business into a raging
success. Most entrepreneurs are running into obstacles on the Web that are hard
to overcome with limited staff and resources. One of the toughest jobs:
providing superior customer service. After all, to make up for what they may
lack in product breadth–not to mention customers’ ability to click instantly
to another site–they have to offer much more personal service.
Another challenge is Internet technology itself. Fast broadband connections
are still largely unavailable, especially in rural areas, leaving many small
businesses stuck with snail-like modem connections. And many worry that they
could lose a lot of customers if their connection goes down. Says Deepinder
Sahni, vice-president at researcher ami-Partners: "What we are hearing is
that they are hesitant to put their crown jewels–their companies–on the
Internet."
For many small businesses, the prospect of competing with the online
behemoths is daunting–for good reason. It may be only a matter of time before
the big guys notice how well they’re doing and jump onto their turf. So they
must stay vigilant, even paranoid, about differentiating their offerings.
That, however, is not the main worry of most small businesses that have moved
online. Their problem: too much business. When Jordan Dossett posted her
graphic-design portfolio a year ago on eLance.com, a Web marketplace for
freelance workers, she was buried under an avalanche of work offers from
companies as far away as Russia. So she quit her job as art director for a law
firm and opened The Design Studio in her Washington (DC) home. After hiring
three employees, she expects to rake in $350,000 in sales–and a tidy gross
profit of $250,000. "I had no idea the amount of demand out there,"
she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of
dead dot-coms would love to have had.
Arlene Weintraub–BusinessWeek