Absolutely...Interesting story in todays Miami Herald Business Section along the lines we have been talking about:
Published Sunday, December 17, 2000, in the Miami Herald
Understanding the Internet Bust
The boom was too good to be true. Now, many investors are stuck with huge portfolio losses. Was America conned?
BY GREGG FIELDS
gfields@herald.com
Investors: tell us your experiences
Were you caught when the Internet bubble burst? Tell us your tech-investing horror stories for a future article.
E-mail gfields@herald.com or send mail to Gregg Fields, Miami Herald, 1Herald Plaza, Miami, FL 33132.
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They sound like dispatches from a war correspondent -- stories about the gravely wounded, the dying and the dead.
Amazon.com, once $104, now trades for under $23.
Theglobe.com, formerly $40, is now 25 cents.
Ivillage, fogdog, mortgage.com -- the list of stocks hobbling badly or mowed down in their youth is virtually endless. These foot soldiers of the New Economy, the front flank of the wired and wireless worlds, are instead casualties of an ambush few foresaw.
The losses easily eclipse those of the 1987 stock market crash. And the frenzy clearly outshines past Wall Street rushes into emerging industries like electricity, radio or biotechnology.
``I got in just a little bit before the peak,'' laments Melvin Klahr, a North Miami-Dade investor. ``I saw this stuff going up and up.''
Klahr believes his broker acted honorably, and he also attempted to do his own research. But separating hype from reality wasn't easy.
``The question is, where do you get reliable information?'' he asks. His biggest regret, he says, was not getting timely advice to sell. ``Nobody rang the bell for me and told me that was the high point.''
Indeed, a growing roster of experts are lumping the thrilling rise and humbling fall of Internet stocks with the greatest financial manias in history -- along the lines of Dutch tulips, Florida swampland in the 1920s and even, perhaps, the schemes of the legendary swindler Ponzi.
``The classic attribute of a mania is, the experts get caught up, everyone gets caught up, in the euphoria,'' said Harold Evensky, a Miami financial planner and early skeptic about Internet investments. ``You see what you believe.''
Few saw it coming. But a close examination shows that the conditions that historically cultivate investment manias quietly shifted into place in the United States in the late 1990s -- whether you're speaking sociologically, technologically or economically.
And unless a dramatic recovery occurs, the Internet bubble that burst last March will go down as history's most expensive -- easily in the trillions of dollars.
The causes of the rapid deflation: Last Christmas demonstrated that electronic ordering wasn't going to replace shopping at the mall anytime soon; mounting cash shortages by Internet firms revealed that profits matter after all; falling profits from stalwarts like Microsoft proved the law of gravity applies even to technology's highfliers.
They may sound like simple truths. But it was a jarring wake-up call to a country that could barely remember the last recession, that had seen the American economy revived by technological innovation.
In fact, some contend that Americans were in some sense conned. Massive marketing, savvy salesmanship and reverential reporting -- Amazon founder Jeff Bezos was named Time's Man of the Year -- all pointed toward a can't-lose world of unfettered cyberwealth.
But Evensky says that's only half the story. If some investors were conned, he says, ``they conned themselves'' by believing in something too good to be true.
Certainly, they can't claim they weren't warned.
In late 1996, Yale economist Robert Shiller made a presentation about the stock market to an attentive group of observers.
Shiller told his listeners that the market was clearly suffering from irrational exuberance. He later wrote a book by that title.
It struck a nerve with one man in the audience -- Federal Reserve Chairman Alan Greenspan. Days later, Greenspan ignited a worldwide selloff when he derided financial markets as indeed suffering from ``irrational exuberance.'' But the setback was short-lived. The markets soon soared anew.
WARNING NOT HEEDED
Why were people throwing hard-earned money into the ballooning tech stock bubble?
``Because their advisors told them to,'' said Shiller, in an interview from Germany. ``I don't think it was rational. A Wall Street adage is, `People don't buy securities; they are sold them.' ''
Shiller is a student of what is called behavioral finance. It focuses not on balance sheets but, rather, the role emotions play in financial decisions.
A classic investment bubble, he says, requires a sense of urgency, a feeling that the prized asset is scarce and must be purchased immediately. With the Internet, the feeling was that stakes had to be claimed early, not unlike a gold rush mentality.
In that regard, the Internet mania greatly resembles the Florida land boom of the 1920s, Shiller said. ``Somehow, the promoters got people believing that all the Florida land would be bought up,'' he said.
Of course, there can't be an investment bubble without investors.
And by the late 1990s, there was a record 100 million of them in America -- and they were particularly susceptible to the Internet's promises.
For one thing, low inflation had made fixed-income investments like savings accounts unattractive; they paid little interest.
Demographically, baby boomers who'd delayed retirement planning were now entering their 50s and needed to feather their nest eggs.
Furthermore, the nation was basking in prosperity. The longest economic expansion in the country's history, and the lowest unemployment in generations, meant that incomes were higher than ever.
Finally, the average family had more control over their financial assets than ever before. The growth of 401(k) plans, where workers get to pick their investments, dovetailed with technological advances that allowed individuals to conduct their own stock trading from home, at greatly reduced prices.
Suddenly, market information was everywhere -- on 24-hour cable channels, in new magazines, on websites that hadn't existed even a few years earlier.
Investors who had longed worried about the downside risk of a falling market now faced a greater concern: The upside risk of missing boundless returns.
Neil Cavuto, a former anchor at CNBC, now managing editor for business news at the Fox News Channel, views the trends in a generally positive light.
``Maybe because I came from a lower-middle to middle-class background, but I like to see everything democratized,'' he said. ``I never liked it in the old days, when the inside crowd had all the info.''
But some critics contend that investors were treated to too many stories about twentysomething billionaires and not enough debate about whether Internet stocks were becoming dangerously overpriced.
``I would argue that, overall, the press wasn't rigorous enough,'' says Tony Perkins, editor-in-chief of Red Herring, a magazine that documents the financial dealings of Silicon Valley.
Perkins, who co-authored The Internet Bubble, published a year ago, said part of the problem is that analysts tracking the industry work at the investment houses making fortunes on the stock offerings.
``I think the financial community was very conflicted,'' said Perkins.
GOOD INTENTIONS
Eric Lopkin, publisher of The Internet Analyst, an online investment newsletter, concurs. Wall Street, he said, was ``trying to get the highest return for clients,'' which was admirable, he says.
But while analysts are quick to tell investors when to buy a stock, they almost never say when to sell. ``Sell recommendations are reserved for the Apocalypse,'' Lopkin says, although he adds with a laugh: ``We have seen some lately.''
However, Cavuto counters that, in a country that wants to get rich quick, where Who Wants To Be A Millionaire is on four times a week, people tend to ignore warning signs.
``People got used to making a lot of money easily,'' he says. ``It made them arrogant. And when you start believing it's all you, that's the top of a bull market.''
In that regard, the Internet stock rage resembled the Dutch tulip frenzy. In both cases, there was an abiding belief that this product was so universally desirable, and so singularly scarce, that value could only increase.
It wasn't true in Amsterdam in the 1630s, and it wasn't true in America in 1999.
Just as tulips can be grown lots of places, so did the Internet companies -- the so-called dot-coms -- see their innovation duplicated by old-line companies.
``The thinking once was that EToys would put Toys R Us out of business,'' says Kevin Hassett, a Washington economist. ``The question is: Is there something we have learned in the last year that would justify a downward swing of 70 to 80 percent in these stocks?'' The answer: ``Incumbents can mimic the behavior of the newbies.''
Hassett was among the cheerleaders of the market. But he took the somewhat contrarian view that it was the Dow Jones industrial average that would boom. He was the co-author, along with former Washington Post columnist James Glassman, of The Dow 36,000.
The title was sometimes derided as hype. And, indeed, the Dow is far from crossing that threshold.
Hassett, however, argues that the book's basic premise remains solid. ``We said that you should own shares in companies that earn money,'' he says.
But profit was a dirty word in the Internet lexicon.
Certainly, startup industries often reinvest earnings in growth rather than take profits. When they mature, they sell stock to the public.
The Internet mania turned that model on its head. Companies went public before they earned profits, saying they'd use the money to build the business.
As an economic model, it made scant sense. But investors didn't seem to mind, in part because it worked -- for awhile. As eager investors poured in, share prices rose. Stock performance was viewed as unrelated to profits.
``It becomes like a pyramid scheme,'' said Perkins, of Red Herring. ``People say, `I know this market (capitalization) makes no sense, but it continues to rise.' ''
Some argued that meteoric growth would eventually justify the astronomical prices.
But Perkins' research of early Internet stocks found they'd need to grow a whopping 83 percent annually for five straight years -- something only one technology company, Cisco, had ever achieved.
SIMPLE PRINCIPLE
``At some point, a company's stock price has to be justified by a relationship to its earnings,'' he said. ``It's just about math.''
And in the end, the math couldn't be denied.
Internet and tech companies began to report disappointing performances. Rattled investors began to retreat and replacements didn't materialize.
Dot-coms became known as dot-bombs. As the market contracted, stock offerings got canceled, drying up the river of capital that covered losses in the past. For instance, this year there have been just 393 initial public offerings of U.S. companies, mostly in the first few months. Seven were canceled just last week.
There were more than 500 this time last year.
Today, the tech-heavy Nasdaq Composite Index trades at about half its peak of last March; it's off 35 percent so far this year. Indexes that specifically track Internet stocks have fared even worse, with most falling by roughly two-thirds to three-fourths of their value since March.
The Dow, belittled as an old-economy dinosaur a year ago, is getting revenge. It's off 9 percent and has a long-shot chance of posting a slight gain for 2000.
What's next?
One thing is clear. The Internet isn't going away just because a lot of Internet stocks are. Proven products have a way of withstanding manias. Thus the Dutch still sell a lot of flowers, and Florida real estate commands premium prices.
Cavuto, of the Fox News Channel, likens it to the early 20th Century, when a spate of auto companies went public. Most went out of business, despite the rising popularity of cars.
``I think, in the end, we'll get the top half-dozen'' as survivors, he said.
If that's the case, it means that greater carnage lies ahead, however. Besides, even with their decline, tech companies still trade at lofty levels.
``The Nasdaq is at 100 times earnings,'' says Shiller, the Irrational Exuberance author. ``It's probably still irrational.''
It's like they read our posts on SI...<gg> |
