Barron's weighs in:"Mania Milestones Forget the Internet IPOs, what about the radish oil bubble?"
By Robert Sobel
Remember the old story about the two traders who kept selling a case of
sardines to each other, raising the price each time? A sure-fire profit on every
trade. Then one decided to sample the contents and found them inedible.
"What did you expect?" said his colleague. "They were for trading, not
eating." So it may be for some of today's Internet stocks -- they're for trading,
not putting into a grandchild's college fund. It's not that different from market
manias of the past, like the South Sea and Mississippi Bubbles, the
17th-century tulip mania, or IPO frenzies of the 19th and 20th centuries. All
of them are examples of what could be called yesterday's Internet
phenomena.
In 18th-century England, for example,
one company was set up to
manufacture radish oil, which had no
known use. Another was organized "for
carrying on an undertaking of great
advantage, but nobody is to know what
it is." The cry in the market, wrote a
newspaper of the time, was: "For God's
sake, let us subscribe to something; we
don't care what it is."
Those companies didn't last long, but speculators who bought and sold in a
timely fashion along the way did well for themselves. The losers? Their money
went to build some of the marvels of the modern world, even though they
never profited from it.
There were similar bubbles in America. During the 1830s shares in canals and
Eastern railroads sold like hot Internet IPOs today. Mark Twain and Charles
Dudley Warner chronicled the post-Civil War railroad booms tellingly in The
Gilded Age. A series of mini-booms accompanied the introduction of the
telegraph and telephone (Western Union caught the first and missed the
second when it declined to buy the Bell system because the technology didn't
look promising).
These booms did their jobs. Before
they turned from boom to bubble and
burst, they got the nation's
transportation and communications
infrastructure built.
Likewise in the 1920s, there were
Internet-style manias in radio, motion
pictures, automobiles and aviation.
Some of the IPOs of that day are still
around. Some aren't. In radio, there were Atwater Kent, Crosley, Grebe,
Grigsby Grunow, Freed-Eisemann, Fada, Philco, Zenith -- and yes, CBS.
The greatest of all was Radio Corp. of America, the star of the market in
1928. In 1921, with a limited future in the field of ship-to-shore transmission
systems (where young telegrapher David Sarnoff had become famous taking
down transmissions from the sinking Titanic), its stock was trading between
$1 and $3 a share. By 1924, as a broadcasting company and after a 5-for-1
reverse split, the trading range was 67-19. On March 3, 1928, RCA sold for
91. On March 12, on rumors that television would soon become available, it
opened at 120 and closed at 138. The next day, it opened at 160 on reports
of a takeover of Photophone.
These wild swings continued throughout the year as Sarnoff, by then RCA's
CEO and guiding genius, transformed it into an entertainment conglomerate.
To be sure, RCA's path wasn't straight up. There were several major
corrections along the way -- in 1923, 1925, 1926 and 1928. Each time, there
were plenty of pundits predicting that the party was over. But it wasn't -- not
yet. In 1929, RCA shares peaked at 573 and split 5-for-1, with a range for
the new stock of 114-26. From then on, the path was downward.
Of course, the stock prices
of other companies,
including some old
warhorses, also did pretty
well during that period. In
the year and a half from
March 1928 to September
1929, when RCA was
rising from 94 to 505,
American Can went from
77 to 182, Anaconda
Copper from 54 to 162,
Montgomery Ward from
133 to 467, Union Carbide from 145 to 414 and Westinghouse from 92 to
313. RCA also had several major market corrections along the way, each
one prompting the pundits to start speculating about whether the party was
over. (Sound familiar?) It wasn't -- yet.
There's another old story -- about the two historians standing on a bluff
overlooking the Waterloo battlefield. One says the spot is important because
the great Napoleon had stood there. "No," the second replies. "It is important
because Napoleon can never stand here again." After its spectacular rise in
the 'Twenties, RCA stock crashed below 10, an ignominious level at which it
still stood in 1947. In 1960, with a $1 dividend, earnings of $1.97 a share and
a strong position in TV receiver sales and with its NBC network doing well,
RCA traded as high as 78. But by the mid-1980s, prior to its takeover by
General Electric, RCA had fallen back into the low 40s.
In other words, when it had nothing but promise, RCA was a $573 stock.
Three decades after the promise was realized, it was going for less than half
its 1929 high. Think about that when trying to assess the prospects for some
of today's highflyers. |
