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" April&amp;#039;s tech swoon gave rise to one of my favorite new Web sites, FuckedCompany.com. The Web site makes a daily tally of Internet companies that have either failed or are beginning to show signs of serious illness. Begun in June, it caught a bull market in its china shop, posting the literally breaking news on ten to twenty companies a day. It picks up company news, rumors, and internal memos from the desks of hapless bosses having to cut staffs, screw customers, or shut down on short notice. Best of all, it also features a sort of dead pool on the site in which visitors are invited to list the five companies they think will be the next ones to croak. Correct guesses win points, and the leaders earn honors on the site. Speculating on which companies will die off is little more than an actuarial exercise, the kind that insurance companies practice all the time. At its best, it is rational, statistical, and probabilistically sound, but the dead pool also shows why smug scolding and finger-pointing about the tech swoon is off the mark. Investing in tech stocks is just the flip side of the naughty guessing game; instead of betting on a few companies they expect to die, tech investors have been betting on a pool from which they reasonably expect some of the constituents to live and prosper. Fabulously so. Monitoring the dead pool offers good clues as to which companies will thrive and change the economic landscape. How? By detailing how the new economy&amp;#039;s victims have fallen. Their misfortune sometimes looks self-inflicted, but just as often,  it looks as though they were unfit by happenstance, the way, say, some species that have been impressively engineered by nature will be unfit when the earth heats up another 2 degrees. Some pines will fall to global warming, and some companies won&amp;#039;t survive the rapid changes of the information age. But just as some flora will bloom even more on a warmer planet, some new companies will grow like weeds.  However in vogue it may be at the moment to point and jeer at the failures, the past suggests that betting on companies in industries with high mortality rates is far from foolhardy; it may even be supremely rational.  When new sectors swoon, it can pay off to stick to souring bets and perhaps place more. Just don&amp;#039;t forget to spread your bet. One pro who is worth emulating in this regard is John Ballen, the celebrated, brilliant mutual-fund money manager at MFS Investment Management in Boston. In emerging industries, he bets on several entrants, fastidiously monitors the race, and moves more money into the stocks that are winning the race. When computer-networking companies started taking off, he bet on Cabletron Systems, Bay Networks, 3Com, and Cisco. Ballen shifted most of his money into the latter as it zoomed ahead, and so did his returns.  One obvious point about tech in-vesting is that picking winners can be fantastically enriching. Companies like Cisco, America Online, and JDS Uniphase have returned to early stock investors hundreds of dollars for every dollar invested and more than a thousand to one for prepublic-offering investors. In the last three years, all three can boast returns between 1,000 and 2,000 percent. These are spectacular numbers, though what&amp;#039;s most notable about them is not their geometric growth but the short period over which they ballooned. Taking into account the long sweep of stock-market history, geometric growth is fairly common. Looking back at another tech wave, the personal-computer boom in the eighties and early nineties, investors had perhaps fifty companies from which to choose. The geometric oomph on the return on investment in all the big makers still standing--Apple, Dell, and Gateway--more than makes up for a lot of bad bets on the others. Go back further to another era of new economies, to the remaking of retail in the seventies. Even if you picked some superstore wannabes that failed, the category was a monster. Wal-Mart would have been one stock in the mix. It has risen 3,700-fold in the quarter century beginning in January 1975!  The rush to invest in new-economy stocks that ply the tech sector, whether in computer networking, hardware, software, or biotech, may be even more rational than investing in PCs or superstores in years past. The reason comes out of some of the same economic theorizing that gave shape to the Microsoft antitrust case. W. Brian Arthur holds the Citibank professorship at the Santa Fe Institute, an interdisciplinary think tank where the study of economics is deeply informed by physicists and evolutionary biologists. Arthur was one of the chief explicators of network effects (how new-economy companies grow strong by creating an interdependent collection of vendors and customers). For example, it makes sense to use Windows and Microsoft applications because so many other people use them. Thus the dominance of Windows grows, and so do the incentives for even more users and developers to accept it. When the network effects are strong enough, monopolies happen. Another example is that eBay cannot be easily unseated as the dominant online auction house because buyers and sellers find sense in gathering there; those who haggle somewhere else online miss out on the biggest collection of buyers and sellers. Arthur has described network effects as one of the characteristics of an economy that is shifting from one of diminishing returns to one of increasing returns.  Consider a classic old-economy company: a coal mine. To begin extracting coal, the mining company needs a relatively small amount of capital to unearth the first nugget. A lone pickax will do. The costs go up as the mine must burrow deeper and deeper. That is a classic diminishing return. As costs go up for one mine, it becomes relatively cheap for new mines to come along and poach on the old-timer&amp;#039;s business. Competition happens.  New-economy companies often work in reverse. The first piece of software can cost millions to produce, but the last one sold--that is, copied onto a disk--costs the company almost nothing. The customer, of course, still pays the full amount for the software and so delivers to the software firm an increasing return. Firms with increasing returns can grow rich very quickly, while newcomers must pour large sums into battling their increasingly entrenched forerunner. Victory in the new economy sometimes results from strategic brilliance but often happens by chance and very often results from a combination of the two. When you&amp;#039;re looking forward, it is extremely difficult to predict which companies will create the network effects that put them ahead.  &amp;quot;My vision of Internet and new-economy companies,&amp;quot; Arthur says, &amp;quot;is that they nudged their way into the market by standing on rooftops and shouting, &amp;#039;Network effects! Network effects!&amp;#039; and the venture capitalists and IPO markets and general investors showered money upon them. Yet, for most of them, the network effects are not that strong.&amp;quot; Arthur feels that Amazon.com, for instance, is at its core a traditional volume retailer with an Internet front door. If it dominates its niche, it won&amp;#039;t be because users get value out of the interaction with other users but because it is simply the best price/service provider in its locale, namely cyberspace, the same way Wal-Mart is the best retailer in the cities where it has killed whole downtown shopping districts. By contrast, eBay has genuine network effects. While both it and Amazon have built good brands, they also demonstrate why branding is not quite the same as network effects. Amazon may be the best low-cost provider, but eBay is valuable to its customers because it is valuable to the most customers. Bet on them both, but only the latter is a true new-economy play. Amazon, after all, will eventually find Wal-Mart is a very serious competitor in its virtual town, too. Of course, it may still win, and it&amp;#039;s worth some of whatever you&amp;#039;re speculating on that sector. &amp;quot;Any one of these dot-com stocks that were floated in the last year or two could be the next Intel, Cisco, or Microsoft,&amp;quot; Arthur says, &amp;quot;so maybe you can spread your bets around a bit. That may be as close as the unsophisticated investor gets to the idea of exploiting increasing returns, but it is not irrational.&amp;quot; Not when the potential payoff is so large.  Cisco&amp;#039;s benefits from network effects weren&amp;#039;t obvious at the beginning, but they revealed themselves spectacularly over time. One caveat: If you concentrate on too few stocks, the odds tip against you. Some investors stick with the stock in the employee-options plan or bet big on one or two companies. Resist the temptation. Even the new economy can&amp;#039;t overcome some kinds of foolishness. "^^<http://www.w3.org/2001/XMLSchema#string>
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