Thanks, Dave. I think you're definitely asking the right questions, and I've gained a lot from your own efforts to answer those questions.
Speculative frenzies are strange things. I'm not sure if the lessons to be learned are ultimately any more profound than the platitudes we all carry with us every day: take profits, set stops, don't fight the tape, the trend is your friend, etc., etc. I picked up a handful of Internut stocks in 1998 and 1999 and felt stupid doing it, because the real business valuations didn't warrant owning those names. I wasn't feeling so stupid in the Winter of 1999-2000 when I sold them, though. In the final analysis, the "value" of a stock is what someone else will pay you to take it off your hands. Sometimes traders use fundamental analysis to root their buy and sell decisions, and other times they use the greater-fool theory. The important thing is to know which trading logic is in effect and play the game accordingly.
I, personally, also think that speculative frenzies can be good for the economy over the long term. Railroads, automobiles, consumer electronics, and the Internet all became central components of our economy in large part through the speculative frenzies they stimulated. These frenzies attracted the capital that enabled the rapid buildout of these technologies, and also generated the excitement that urged individuals and businesses to adopt these technologies. Businesses today wouldn't be racing to incorporate electronic B2B capabilities if it wasn't for the speculative frenzy surrounding the dot-coms. Did the dot-com frenzy lead to a degree of capital misallocation, financial volatility, and some heartbreak among investors who got in high? Yes. But it also led to the incredibly rapid adoption of new technologies that make our businesses much more efficient than they once were. This will have important economic ramifications over the long run.
I always thought it was a bad rap when we called the dot-com frenzy "Tulipmania" -- because the dot-com frenzy was really generating technologies that will provide the infrastructure for future communications and information management. The tulip craze created nothing of enduring value. |
