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A Real Manifesto: The Internet Changes Nothing

Montmorillon is a small, beautiful, bucolic town in France.
 
It sits roughly 220 miles southwest of Paris... just past Poitiers. A lazy river runs through the middle of town, which is filled with medieval stone structures. The massive bridge over the river looks like it was built in the 1300s. It's a focal point for tourists: Everyone who visits gets his picture taken on the old bridge.
 
It's the kind of town where nothing important has happened in a very long time. It's the kind of place that becomes famous for something simple... like cookies.
 
They're called macarons. They're almond cookies with crème in the center – the inspiration for the Oreo. People all over France come to Montmorillon for the cookies. It's that kind of place.
 
The surrounding fields are almost perfectly flat. They're filled with sunflowers and wheat. They're separated by neat hedgerows and cultivated by older farmers, wearing blue pants. This is a very traditional part of France. They don't know there's anything wrong with foie gras. (And they're right!) Everything around Montmorillon looks like an impressionist painting, even the stars. On a dark, clear night, the Milky Way is visible from horizon to horizon, something I  have been lucky to see on many nights.
 
Large and ancient chateaux dot the surrounding area, each named after the family that built it. Some have been in the same families for more than 1,000 years – a record of sustained property ownership that's unsurpassed in the West.
 
That's one of the main reasons my friend and business partner, Bill Bonner, bought a chateau near Montmorillon in 1996. Bill, as you may know, is the chairman of Agora Inc., a global holding company with interests in publishing (including Stansberry Research) and real estate (such as Rancho Santana, Nicaragua).
 
The Bonner family chateau is called "Ouzilly." Its foundations and the surrounding farms are about 1,000 years old. The main building sits right on the old Roman road, which runs straight as an arrow southeast toward Limoges. It's not unusual to find old structures next to a Roman road. In "Gaul" alone, the Romans built more than 13,000 miles of paved roads – almost all of them were perfectly straight.
 
The structures at Ouzilly were last greatly improved during the 1870s. Magnificent immense pieces of furniture sit inside the chateau. As you walk through the many rooms, you wonder... how did they get that in here? The walls are stone. And the doors and windows are fairly small. The answer: They built the furniture in the rooms.
 
In America today, people own their homes for an average of five years. It's hard to get your head around the idea that people built these places to last hundreds of years. They made huge capital investments because they expected their families to benefit from them for generations, even centuries.
 
The other difficult thing to grasp about this part of the world is the latent feudalism. France calls these districts "communes." Some people who live in Ouzilly will spend their careers working on the chateau – like the man who specializes in repairing the slate roof. It was his father's job before his, and so on. Thus, when you buy these houses, you're also buying a small town. Ten other families live in the community of Ouzilly, about 60 people in total.
 
Ouzilly is a living monument to lasting traditions and technologies that have stood the test of time, like the slate roof, the Roman road, and traditional methods of farming. Meanwhile... throughout the rest of the county, you'll find countless monuments to failed revolutions.
 
I'm more aware of these differences now... looking back...
 
I first visited Ouzilly in August 1999 – 14 years ago. Bill asked me to come because of the Internet. A technology revolution was brewing. The Internet heralded dramatic changes across the business landscape... most clearly to companies involved in communication and information, like ours.
 
You have to remember... back then, the Internet was new. Most people were just experiencing the Internet for the first time. The technology was obviously powerful for distributing and storing information. It put all kinds of information at people's fingertips – and nearly all of this new information was free.
 
Newspapers – except for the Wall Street Journal – decided to put their copy on websites and allow people to read it for nothing. We knew our subscribers were getting online, too. Would they continue to read financial newsletters, which specialized in getting hard-to-find information for investors, if they could get the same kind of information for free off the Web? We didn't know.
 
And that wasn't Bill's only concern.
 
Along with the Internet came a whole different kind of radical culture... a revolutionary culture that seemed openly hostile to commerce... a culture that preached a kind of techno-socialism... that at its core held that information ought to be free. This viewpoint labeled anyone who limited the free flow of information an enemy. That sounded a bit like us...
 
The Cluetrain Manifesto (www.cluetrain.com) is a great "marker" of this period. It was published online in the late 1990s. It summarized what the engineers and the scientists who had created the Internet believed about economics, business, and the flow of information in the Internet. The website included the group's 95 "theses" about how the Internet would radically destabilize corporations and eliminate the role of capitalism in producing information.
 
The authors clearly believed their efforts were akin to the 95 theses that Martin Luther nailed to the Castle Church of Wittenberg on All Saints Eve (October 31) in 1517. Luther, of course, began a revolution in the church (the Protestant Reformation) that led to a long period of religious war in Europe.
 
Martin Luther's crusade was to get commerce out of the church – mainly to stop selling "indulgences." He objected to the fund-raising efforts of Johann Tetzel, a Dominican priest, who began selling absolution to German believers to support a renovation of St. Peter's Cathedral in Rome.
 
The practice was controversial even before Luther. Most German princes wouldn't allow the sale of indulgences in their lands. But the German Archbishop did allow it... but only in exchange for a share of the proceeds. The archbishop was deeply in debt, due to the expense of buying his way into a high church office. None of these issues would have ever come to the light of day, except Martin Luther's letter was widely distributed later, in 1518.
 
Watch out, businesspeople, the Cluetrainers seemed to warn. Like the printing press took down the Church, the Internet will take down corporations...
 
Employees are getting hyperlinked even as markets are. Companies need to listen carefully to both. Mostly, they need to get out of the way so intranetworked employees can converse directly with internetworked markets.
 
Looking back, it's easy to laugh at the nonsense these guys were spouting. But you have to remember... at the time these same web-savvy people were turning the stock market on its ear. They were raising hundreds of millions of dollars, often overnight, for companies that had no revenue... or a business model that made any sense.
 
Remember K-tel.com? Webvan.com? DrKoop.com? And don't forget AOL. This company might have been the biggest stock farce of all time. It sold horrible dial-up Internet access, published a terrible website using other people's content, and was widely known to be accounting for its marketing expenses as a capital investment... which was allowing it to record phony profits quarter after quarter. And yet this garbage business, which should have gone bankrupt, was able to buy all of Time Warner, the giant blue-chip publishing company, using nothing but its own worthless shares.
 
In time, that deal would fall apart and tens of billions of investors' capital would be written off. But in the summer of 1999, Bill Bonner had good reasons to worry about what the Internet... and the people who'd built it... meant for the future of his company.
 
So Bill had invited about two dozen young people from his various businesses and a handful of people who'd launched websites based around finance to his chateau. The outsiders (and a few of Bill's people) were convinced that the newsletter industry's subscription-based business model was dead.
 
They pointed out that newspapers and magazines were dying: Their subscribers were moving to the Internet, and the content was all free. We were told the Financial Times was for sale – the best business newspaper in the world – because its owners were convinced that the business model was dead. At the time, you could read the FT for free online. (Not to spoil this story's ending, but today, Web access to the FT's newspaper content costs $8.59 per week – about $450 per year. That's not cheap...)
 
At the end of our week at Ouzilly, Bill had listened carefully to dozens of different ideas, models, and analyses. And after reviewing all of the publications and looking at more than 100 websites... he invited the group to the best restaurant in Montmorillon for dinner.
 
Here, in an ancient medieval town, where almost nothing important ever happens, he made his stand.
 
After dinner, before dessert was served, he stood up and did his best impersonation of the dot-com crowd. He crucified them with logic... and also with humor. Taking their arguments to their outmost ends, he made clear the gigantic fallacy of their basic premise. He simply asked, who would continue to provide thoughtful, valuable, and useful information, data, news, or analysis... if no one eventually paid for it?
 
Clearly, the revenues generated by the online advertising model were minuscule and unlikely to grow enough to make up for the total loss of subscription revenue and ad space. Yes, obviously, some parts of the newspaper business were likely to be lost forever – like classified advertising, which most people didn't understand was the real financial engine of every local paper.
 
More important, Bill knew that simply having access to more information wasn't going to make anyone smarter or a better investor. Most of these websites were built around user-generated content – message boards. And most of the people posting messages were idiots, who either knew nothing about finance... or worse... believed all of the wrong things. Anyone using these services would soon be broke.
 
Or as Bill said looking at these websites, "One of the great marvels of life isn't that a fool and his money are soon parted, it's that they ever got together in the first place."
 
In his book (Financial Reckoning Day), which was written during the dot-com bubble, Bill summarized most of what he told us that night.
 
The techies had no real knowledge – just a pretense of knowledge – big hollow ideas that in the end meant nothing. Granted, they had technology, but they had no more idea of what it might do or what it might mean than anyone else. Probably less – since they tended to have so little real experience.
 
Each revolution seems to demand a New Man to go with it... or go along with it. The French Revolution produced the "Citizen" sans-culotte eager to crucify the priest from whose hands he formerly took the sacraments and chop off the head of the aristocrat whose land he had tilled. The Russian Revolution produced a New Man, too – the new Soviet Man, who could not only do the work of 14 normal men, but was above the reach of normal emotions and bodily functions. As Trotsky put it, he would be able to "master even the semi-conscious and unconscious systems of his own body: respiration, the circulatory, digestion and reproduction."
 
Those who got it [the Internet] were supposed to know deep down, an inchoate, indescribable truth that the rest of us could not quite fathom. As a result, Digital Man – a race of mutant Homo supersapiens – was supposed to not merely inherit the world, but to take it by adverse possession. But none of the New Men in history (from Russia, France, or elsewhere) ever succeeded in eliminating the weaknesses and sins to which we humans are heirs. And even if there were a "New Man" for the "New Economics," he was apparently very similar to the old one: "greedy, obsessed, and ignorant" were the words that David Denby, writing in the New Yorker, used to describe the New Men he saw around him.
 
Bill, whose publishing empire at that time was worth maybe $100 million, looked at the Internet and saw nothing more (and nothing less) than a very capable fax machine, being operated by fools. He didn't see a revolution. And he couldn't have cared less about manifestos or the risks posed by dumb investors doing even dumber things with their money.
 
Instead, Bill decided to use the technology to continue doing what he'd always done – serving his subscribers. He argued that the Internet and, in particular, e-mail would allow us to do more for our readers at lower prices. He wagered that with the ability to buy more from us at a lower total cost, our subscribers would. So he began writing to his subscribers, via e-mail, on a daily basis, establishing a very successful new model for publishing. We've done the same since 2006 with our Stansberry Digest.
 
Bill figured out long before almost anyone else that great financial journalism – work worth paying for – wasn't merely information. What lay behind great financial journalism hadn't changed at all. The deluge of information and misinformation made what he had to offer his subscribers – knowledge, judgment, experience – far more valuable than it had been.
 
The other nonsense was just noise. Eventually, after they'd heard enough noise, people would realize what they needed wasn't more information. What they needed was expertise. And so, they would subscribe in larger numbers than they ever had before.
 
Today, Bill's empire is probably worth more than $1 billion. And my Investment Advisory newsletter... which back in August of 1999 had around 5,000 subscribers is now, by all accounts, the world's most widely read financial newsletter. All of the free websites, some worried, would put us out of business have either disappeared... or ironically enough... now offer paid-subscription newsletters.
 
And the dot-commers who attended the seminar at Ouzilly? What happened to the folks who told us we'd soon be broke... that we'd be "hyperlinked into oblivion"?
 
They were, to a man, out of business in less than 24 months. Many ended up sleeping on their parents' couches, looking for a new job. Sure, they'd been millionaires – at least on paper – only weeks earlier. But they didn't know anything about business. They had no idea how to create value for their shareholders and even less about delivering value to their customers.
 
Most of all, they simply didn't understand anything about why people buy things. They didn't have any respect for commerce because they didn't know anything about it.
 
Good investing,
 
Porter Stansberry

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