Fred: A brief CIC mention in today's Toronto Star Newspaper.
Tom D.
Beware of greed in today's tech-stock frenzy--David Cranes' Column
THE WARNING by the chairman of the U.S. Securities and Exchange Commission, Arthur Levitt, against a ``casino mentality' in U.S. stock markets and the tightening of margin credit for dot-com stocks by Canadian investment dealers are signs of growing concern over the speculative fever for Internet stocks.
It's also a concern that exists among some members of the high-tech community, such as Scott Paterson, president of Yorkton Securities Inc.
He is one of Canada's champions of the new high-tech economy and a leading financier for many of Canada's emerging high-tech companies.
But he recognizes that investor enthusiasm for Internet, e-commerce and biotech stocks is in danger of creating a bubble that at some point could burst with a loud bang.
What brought this risk home to Paterson was a recent picture in Hong Kong of more than 250,000 would-be investors fighting to get into Hongkong and Shanghai Banking Corp. offices to buy shares in a new Internet stock offering for tom.com, controlled by Li Ka-shing, Hong Kong's leading tycoon.
``It's the kind of picture 20 years from now that could be in history books. Students may look back and say how silly we were and how obvious it was that speculation was out of control,' he said.
Paterson maintains real value resides in many of Canada's Internet economy stocks, but acknowledges that investor frenzy could lead to a stock-market bubble.
Half the buyers don't know the fundamentals of the companies they are buying, and about 80 per cent of trades each day could be from day traders, buying and selling the same shares over and over again, he says.
But Paterson also contends that something important is also going on: a fundamental restructuring of the economy.
``Never before have we seen such a shift in the way the world will operate,' he argues, pointing to the convergence of information and communications technologies, which have propelled the Internet and e-commerce and which will make the genetic breakthroughs of biotechnology possible.
The problem is that investors cannot tell which will be the ``category winners.' So, like geologists looking for a rich new ore body, people end up putting stakes everywhere just to be sure.
The new-economy frenzy is not confined to brand new dot-coms that emerge out of nowhere.
In the last 12 months, Nortel Networks Corp. has moved from a low of $44 to as high as $192. Likewise, JDS Uniphase Corp. moved from a low of $28.75 to a high of $219.
But it is the younger companies that have really stirred the excitement of investors. Janna Systems Inc. a year ago was trading at slightly more than $2, but has since reached as high as $41. Certicom a year ago was trading at $10.35 and since then has climbed as high as $250.
But there have also been losers. For example, Chapters Online Inc. was introduced with great fanfare last year in an initial public offering. The stock hit $28 but is now trading at less than $10. This led rival bookseller Indigo to postpone its planned e-commerce initial public offering.
One new factor in Canada, Paterson contends, is the creation of CDNX, Canada's stock market for junior companies. The market has great liquidity and is attracting growing numbers of investors, which in itself encourages more Canadians to start companies or seek equity, knowing the chances of getting capital are good.
In fact, Paterson believes CDNX will have a major impact on Canada in what he calls ``behavioural modification as it relates to entrepreneurial activity.' He sees ``a direct correlation between the perception of access to capital and entrepreneurial activity.'
In this kind of entrepreneurial environment, driven by sweeping technological change and the opportunity for new young companies to challenge the traditional blue chips, there is bound to be speculation. That's part of the risk-reward equation.
But none of this excuses investors from understanding what they are investing in, or recognizing the risk in an environment of uncertainty. The herd instinct is always dangerous. That's why smart investors will balance their risks and not be too greedy.
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