Is it different this time? Ron chernow from the oped section of todays ny times
<<As the Nasdaq plunged into bear market territory this week, we suddenly beheld the dark side of democratization on Wall Street. The speculative bubble in technology stocks may be the first in history to feature small investors as the driving force behind the mayhem instead of its belated, gullible recruits.
For most of Wall Street history, the proverbial "little people" regarded stock investing as a form of black magic and followed the lead of market insiders. A vintage image of the 1920's is of a chauffeur or bootblack eavesdropping on rich clients and rushing off to profit on hot stock tips. Figures like John J. Raskob, financial adviser to the Du Ponts, and William C. Durant, founder of General Motors, assumed heroic stature as market buccaneers.
Investors flocked to investment trusts, precursors of today's mutual funds, that often traded at absurd premiums to their underlying assets. Why? Because investors glorified the trusts' managers as infallible founts of financial wisdom. In this unregulated market, professional speculators, organized into pools, openly manipulated more than 100 stocks on the Big Board. Far from being unnerved by these gamblers, small investors welcomed them as public benefactors who considerately kept prices high.
Like the Nasdaq ebullience of the 1990's, the "irrational exuberance" of the 1920's was a case of rational exuberance run amok. Production, employment and wages steadily advanced while inflation remained subdued. Investors thrilled to dazzling new technologies, including radio, motion pictures, automobiles and airlines. In this innovative age, chain stores pioneered new distribution methods while electric utility holding companies experimented with new corporate forms. Investors had ample reason to celebrate.
As in every stock bubble, the speculative tempo accelerated, culminating in a final phase in which the market soared vertically. Investor attention narrowed to a handful of allegedly foolproof stocks -- Radio Corporation of America, United States Steel, Westinghouse and Montgomery Ward -- much like Microsoft, Cisco, Yahoo and Intel today.
This pattern recurred in the aftermath of the protracted 1960's boom, when growth stocks dubbed the Nifty Fifty -- boasting technology leaders like Xerox, General Electric and I.B.M. -- formed an indispensable part of every portfolio. Small investors still deferred to Wall Street demigods, whether "gunslinging" money managers like Gerald Tsai of the Manhattan Fund or corporate chieftans like Harold Geneen, president of I.T.T. and leading architect of the conglomerate boom.
Once again, in the Reagan boom, professional traders and raiders (Carl Icahn, Boone Pickens, and Michael Milken spring to mind) set the frothy tone that lured in small investors.
As we all know, by the early 1990's, small investors possessed the means to vie with professionals on an equal footing. The Internet and other information technologies slashed stock commissions, glutted investors with information and provided instant trading quotes. The advent of 401(k) plans shifted the investing onus from corporate managers to often unsophisticated employees.
The trend, we were told, promised manifold blessings. Vast flows of money into the market would give it new depth and balance, demoting the swashbuckling speculators of old. And in a country that preened itself on its populist roots, who couldn't cheer a development that divided profits more equitably?
At first, the novice investors proved surprisingly mannerly. Tutored to buy and hold good stocks, they turned to broad-based mutual funds for professional management and diversification.
But the giddy annual rises in the market averages persuaded many that the risks in common stock were overblown. They began to switch money from stodgy mutual funds into fast-growing companies or funds dedicated to high tech, biotech and telecommunications. Main Street began to drive Wall Street, inverting the power structure and dethroning brokers, investment bankers and money managers as ultimate market arbiters.
Unlike the 1920's, 1960's and 1980's, the current Nasdaq bubble has lacked those oracular professionals and storied insiders who symbolized earlier booms. (Perhaps the best claimant to certified guru status is the analyst Abby Joseph Cohen of Goldman, Sachs, who has cooled on the market of late.) Welded together by Internet chat rooms and nonstop cable television coverage, legions of retail investors have formed a critical mass of opinion, rudely casting aside the wisdom of such value investors as Warren Buffett.
Should Wall Street be absolved of responsibility for the lunatic levels reached by tech stocks? By no means. Our most prestigious investment houses have invented bogus mathematical formulas to justify stratospheric stock prices and have fed the inexhaustible appetite of small investors for Internet businesses that are little more than concepts dressed up as companies. Yet at the same time, many Wall Street veterans have repeatedly warned of the insane valuations of tech stocks. And the industry is rife with asset managers coerced by competitive pressures into buying stocks they knew were overvalued.
The widespread involvement of ordinary Americans has made this bubble more volatile and hazardous than its predecessors. Adding further worry is that many high-flying companies lack any pretense of profitability -- a small defect that would have deprived them of a decent stock market listing before the 1970's.
This is not to say that there are no redeeming factors in the current scene. The tech boom depressed many old economy stocks whose recent resurgence may act as a stabilizer (although Friday's performance of the Dow dimmed hope for this prospect). The structure of many 401(k) plans dictates that money will flow into other financial assets as it flows out of the bloated tech sector, buoying the bond market and undervalued stocks.
The Nasdaq mania has shattered the hierarchy of Wall Street, with the professionals forced to abdicate authority to the amateurs. While brokers and financial planners are scarcely saints and have contributed to past bubbles, they can, potentially, provide historic perspective to temper the wilder excesses of new investors. Perhaps if the Nasdaq continues to tumble, professional expertise will actually come back into vogue, and the dull imperatives of profit and loss will again govern stock prices.>>
nytimes.com |
