ODB - if one accepts the following premises, which, as far as I know, are true:
1. 90% of new businesses fail (could be more, this is a conservative estimate);
2. New technology is being invented every day which makes old technology obsolete;
3. The pace of invention of new technology is faster than it ever has been;
I think one is forced to concluded that it is inescapable that much of what savvy, intelligent people invest in with the best intentions in the world is going to turn out to be malinvestment, in retrospect.
What is different about the last few years is, I believe, that never before have ordinary investors so willingly, eagerly served the function of venture capitalists, with very little knowledge of the business in which they were investing other than that it was the new, new thing.
I believe it's at least partly because never before have ordinary investors been given the opportunity to direct their own IRA plans and 401K plans. Those who started directing their own retirement plans at the beginning of the bull market made extraordinary gains, and had enough that it made sense to get aggressive.
They don't use Benjamin Graham or other traditional techniques of valuation, they don't even follow Warren Buffet - they follow waves and momentum and relative strength. They invest in Gorillas and Kings, they have Rulebreaker portfolios.
Investing in new technology is extremely risky. Hopefully, most of the people who took the risk could afford to do so. Certainly many of them made out very well.
I haven't seen any hard evidence that people invested in the stock market using borrowed funds. My perception is that more people are buying houses than ever before, with low or no down payments, and that people are borrowing to buy things. A prudent borrower would pay down his/her cards rather than put money in the stock market if and only if the interest rate on the credit cards and/or home equity loan was higher than rate of return he/she could get in the stock market. I am looking forward to documentation on this - probably the people who are debt-strapped are very different people than the ones who are in the stock market.
I think the phenomena are coincedent in time and place, but not directly connected. Over the last decade, the rich got much richer and the poor stayed even. The working poor are maxed out, the upper middle class and rich are in the stock market. |
