The Daily Interview: Investing on Internet Time

Bob Davis works quickly.


Bob Davis
Vice Chairman,
Terra Lycos
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Six years ago, he knew nothing about the Internet other than that an old friend of his was trying to find a CEO to run an Internet company called Lycos. After a crash course in the new medium, Davis, a veteran computer industry salesman, snagged the job.

Following a tumultuous five years, including an abortive effort to join the business with USA Networks ( USAI) properties, Lycos finally merged with Spain-based Terra Networks to create Terra Lycos ( TRLY).

In February, Davis resigned as CEO of Terra Lycos. And now, less than four months later, he's published a book, the appropriately titled Speed Is Life. A management-advice book, it's also a memoir of his less-than-privileged childhood and his ups and downs in the technology business. Davis is donating his share of the book's proceeds to the National Center for Missing and Exploited Children.

Davis remains vice chairman of Terra Lycos and recently joined the venture capital firm Highland Capital Partners. He sat down with TheStreet.com to talk technology and investments.

TSC: One of the things you talk about in your book is the concept of first-mover advantage. How do you apply that concept to investing? How do you find companies that have first-mover advantage?

Davis: I believe it's very dangerous to look at a single success factor around a company and develop an investment thesis around that single item. My own investing style in my own purchase decisions when we were acquiring companies at Lycos related to a complete package, not to a single factor. So as much as I talked in the book about first-mover advantage and believe in its importance, we cannot look at it in a vacuum.

Nor can we look at any other single components in a vacuum. I have a chapter that talks about profit and the need for profits. That, unto itself -- if we're in a dying market and a dying business -- could be a misleading indicator. I may have a company that's showing a record year in terms of earnings, but if I took the time to look out a little bit, I might find out that their market is eroding, and the record year that was posted today may not be a record year 12 months from now.

TSC: Can you talk about your personal investments now? How much is in the public market, and how much is in Internet-focused companies?

Davis: I don't want to discuss what individual investments I have, but I maintain investments today in certain Internet companies, as well as in bonds, as well as in cash.

I'm still, generally speaking, nervous about the state of the markets right now. As I look forward, I see and hear too many CEOs that profess limited visibility, or lack of visibility, one and two quarters out. That is a frightening indicator to me. And until I see a greater number of CEOs speaking with a sense of bullishness or a sense of confidence about the near-term quarters, I would remain more heavily weighted in investments other than equities.

TSC: What's your mission at Highland?

Davis: My role at Highland is to do a couple of things. One is to identify new business opportunities that Highland might invest in. Two, it's to help to the extent that I can provide any advice or counsel to existing portfolio companies. And three, it's to consider what, if any, other business that I might choose to run myself.

I haven't made a long-term commitment to being a venture capitalist. I may end up jumping out and running a business again. In fact, I would say that that's more likely than not that I will do that, although it's still up in the air quite a bit.

TSC: Can you talk about what you've invested in in the past? Why it was a good idea or a bad idea?

Davis: I invested in Cisco ( CSCO) several years ago. I worked for John Chambers at Wang Laboratories. I spent a number of years working for him. I developed great respect for his leadership capabilities. He left the company to join Cisco. I followed a little bit from the sidelines.

I lost a little bit of touch with John for a couple years but I watched the company, saw it develop an aggressive style in the market. It was a market that I believed, intuitively, was going to grow. So I purchased some Cisco and made a wonderful return on it. If I made any mistake, it was that I didn't follow my gut quickly enough with Cisco. So I didn't buy enough early enough. But nonetheless it worked out very well for me.

TSC: We should all be lucky enough to have as an investment strategy to know John Chambers early in his career.

Davis: Well, I could say similarly I purchased a number of years ago -- where I didn't know anyone -- I purchased some EMC ( EMC). And I did very, very well with EMC stock I owned. It was a market that I understood, not intimately, but well enough to believe in it. I saw that EMC appeared to be establishing itself as a standard. At that point it wasn't the market leader. It was on its way to market leadership, but was still a long way from that. I believed that they had an opportunity to, if not capture the dominant spot, at least make significant inroads. And in fact they did.

So that became a good investment for me, but it's also a market that I understood. And a market that I was knowledgeable enough to make what I would consider a qualified investment decision.

I really believe very strongly that where people often run into difficulty as investors is where they are making bets with inadequate information. It's tough to make a qualified investment decision in an industry you know little or nothing about. Similarly, it's hard to make a market-segment call if I don't understand the business.

I believe that all too often, individuals are investing in segments where they have limited knowledge. If that's the case, it would be far wiser to adopt a broad-based mutual fund strategy, and let experts work for us rather than our trying to predict, when we have no basis for prediction.

TSC: Are you still a Cisco shareholder?

Davis: I am. And I'm a long-term believer in Cisco. I believe that Cisco is right now a victim of broad-based market turmoil. When markets recover, I think that Cisco will be a prime beneficiary of that.

TSC: What other companies do you like?

Davis: I like Amazon ( AMZN) very much. I believe that Amazon has carved out a market segment for itself that is as broad-based as shopping, and that it has the opportunity to become the Wal-Mart ( WMT) of the Web.

I like Yahoo! ( YHOO) despite the fact that I believe that Yahoo! missed an opportunity as it relates to buying significant assets when its valuation was a hundred-plus billion. They have a global brand for themselves. And as the advertising markets recover, I think Yahoo! is positioned very well.

I like CMGI ( CMGI). I think it's a company that has transformed itself very nicely. It has a strong cash reserve. And also, as the market rebounds, it is a beneficiary.

TSC: But you were saying that this is a time that makes you a nervous investor.

Davis: It is a time that makes me nervous. But that's not to say that I'm not buying any stock whatsoever right now. In good times or in bad times, we know there is money to be made in the financial markets.

TSC: What challenges does Terra Lycos face?

Davis: One, continuing down a path of successful integration. We have two cultures that are coming together. That is going well. But that needs to continue to happen. Second, I would say external factors. Which means the general state of the marketplace itself and when does it recover.

TSC: Going back to visibility, what are you waiting for? Is it just as simple as picking up the paper one day and finding that people have started saying, "We have visibility?" Or are there other signs that you are waiting for?

Davis: Market timing is always a difficult thing. When to be out and when to be in is tomorrow's newspaper, which I haven't figured out a way to buy just yet. There are many things that could be important. Management confidence, although a difficult one to measure, is a wonderful barometer, as far as being an indicator.

TSC: How focused on technology are you among your equity investments? Are you worried about technology stocks more or less than you're worried about nontech stocks?

Davis: I am probably weighted technology/media because it's a business that I understand very well, and among the many rules of investing is to focus on that with which you are most knowledgeable. So I understand the marketplace.

TSC: Is visibility elsewhere better or worse than the tech sector?

Davis: I'm hearing it's a problem across the board.

When I talk about people looking forward, and hearing CEOs looking forward and expressing lack of visibility, I'm not referring at all to a tech-centric audience. I'm referring to companies far and wide that are expressing that limited confidence.

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