A very good comparison and a chart worth looking at: "Bursting of the Tech Bubble Has a Familiar 'Pop' to It
interactive.wsj.com
By STEPHEN E. FRANK and E. S. BROWNING
Staff Reporters of THE WALL STREET JOURNAL
It was a bubble, and it did burst. About that, most people agree.
What everyone really wants to know is, what's next? How much, and how
fast, can technology stocks recover?
Investors trying to make sense of the dot-com debacle might do well to
recall the story of William C. Durant. Early in the 20th century, Mr. Durant
founded General Motors Corp., one of a revolutionary group of auto
companies that in some ways were the dot-coms of their era. Investment
capital poured in and GM stock soared more than 5,500% from 1914 to
1920.
But when the overcrowded automobile industry failed to deliver on inflated
expectations in the early 1920s, auto stocks plunged. GM lost two-thirds
of its stock value in six months. A panicked Mr. Durant borrowed money
and feverishly bought the shares in a futile attempt to prop them up.
GM, of course, eventually recovered and soared again -- too late for its
founder, who lost his entire fortune and wound up running a bowling alley.
Many other once-great auto companies, such as Packard, Studebaker and
Hudson, fared less well than GM, disappearing one by one in the ensuing
decades.
And therein lies a cautionary tale for investors who have sat in shock as
Cisco Systems Inc. stock has lost more than 70% of its value and Yahoo!
Inc. shares have fallen close to 90%.
The current technology boom and bust, it turns out, is nothing new. It is
simply the latest in a long history of investment bubbles that have plagued
shareholders since investing began. From the Dutch tulip-bulb craze of the
17th century, to the locomotive revolution of the 19th, to the rise, fall and
resurrection of personal-computer stocks and biotechnology stocks in the
1980s and 1990s, investors have fallen madly in love with -- and then
madly out of love with -- the hot technology of the moment.
These past debacles offer lessons for investors trying to figure out what to
do after the Nasdaq Composite Index's 57% fall from its peak last March
10 of 5048.62.
Bubble watchers say the worst may not be over. Just as the stocks tend to
overshoot on the way up, bubble stocks tend to overshoot on the way
down as well. Through Thursday, the Nasdaq index has lost 3.5% this
week alone, and is below where it ended the year in 1998.
History does suggest that, eventually, many of the pieces of a burst stock
bubble get patched back together. Some of the stocks will soar again. But
the recovery typically takes longer than investors hope -- usually years, not
months. Many of the stocks caught up in the bubble fail to survive, and of
those that do survive, all but the most robust wind up behaving less
exuberantly than they did before.
Technology companies "are going to take a
good whack, a good hard landing, and you
can't expect that they are just going to shrug it
off and go up to new highs and forget it," warns George Roche, chairman
of Baltimore mutual-fund group T. Rowe Price. "You are going to require
a period to repair it."
Some optimists hope the recovery this time may come faster than it has
after past bubbles. They point to the intervention of the Federal Reserve to
stimulate the economy, and to today's pace of technological change,
information flow and inventory adjustment, which is far faster than anything
known in the past.
But even the most bullish observers aren't predicting an immediate
snapback. In fact, a ghoulish fascination is developing among professional
investors over the parallels between the current tech wreck and past stock
disasters. Many of the pros have been sending one another charts
overlaying an index of Internet stocks or the Nasdaq Composite against
charts showing the biotechnology bubble that collapsed in 1992, the Dow
Jones Industrial Average around 1929, or the 1990 collapse of Japan's
Nikkei 225 Average.
The basic truth market historians draw from past bubbles is that it almost
always takes longer to repair the damage than people expect.
After the economic crash of 1837, for example, it took a handful of
railroad stocks a solid decade to regain precrash levels -- and most didn't.
GM's recovery took six years, about the same period it took most
personal-computer and biotech stocks to rebound in recent times. The
Japanese stock market topped out at the end of 1989, and remains 67%
below its peak.
Most recently, investors point to the 1992 biotechnology collapse. Biotech
stocks, as measured by the American Stock Exchange Biotechnology
Index, didn't stop falling until March 1995. They didn't regain old highs in a
lasting way until December 1998.
There is also the fate of the electric utilities in the 1920s. Bearers of a
breathtaking new technology that transformed the world just as the Internet
is doing today, it was 1964 before they returned to their 1929 peak, and
they never regained the vigor of their youth.
Radio Corp. of America was another highflier of the 1920s. America's
fascination with the radio propelled RCA's shares to a high of $500 just
before the '29 crash -- an increase of 2,000% over six years. The crash
wiped out all those gains, and it took more than three decades for the
stock to revisit its highs. Even then, RCA, which had become a television
company, ultimately was undone by competition, and wound up being split
up and sold.
Today's technology pessimists, such as Jeremy Grantham, co-founder and
chief strategist at Boston money-management group Grantham, Mayo,
Van Otterloo & Co., argue it could be a decade before technology stocks
turn convincingly upward.
Mr. Grantham has tracked more than a dozen past bubbles involving gold,
oil, nickel, the dollar, the British pound, Japanese stocks in the 1980s and
U.S. stocks in the 1960s. In every case, he says, the stock, commodity or
currency gave back all the extra, inflation-adjusted gains beyond what it
would have attained if it had simply maintained its slower, prebubble
performance. He believes tech stocks have still farther to fall, and that they
will pull the broader market down into a lasting slump as well.
Not everyone's outlook is so bleak, of course. Henry Blodget, the Merrill
Lynch Internet analyst whose name became synonymous with dot-com
euphoria, says the worst of the downturn will be over by the latter half of
this year. But even he believes complete recovery to last spring's highs
could take as long as three to five years, even for some Internet
bellwethers like Yahoo.
"I think we still have a ways to go in terms of working through the ripple
effects of the bubble," Mr. Blodget says.
Another lesson from past bubbles is that, while some stocks such as
General Motors do bounce back and soar again, it can be maddeningly
difficult to figure out which will be the winners.
It is almost always a mistake to "catch a falling knife," as they say on Wall
Street, which means to buy a plummeting stock. Even once-strong
competitors can sag. Today, most investors would identify names such as
Cisco, Sun Microsystems Inc., AOL Time Warner Inc. and eBay Inc. as
leaders of the technology and Internet sectors. But those stocks all are
down between 40% and 70% from their highs. Will they all recover?
Veteran money-manager Steven Leuthold, who heads Leuthold Group in
Minneapolis, recalls his first electronics bubble, in which he lost some
money in 1961 and 1962. The companies to own back then often had the
syllable "tron" in their names, such as Transitron and Flowtronics. They
aren't around today. "The lesson that you learn from all of these
experiences is that they don't go on forever and there aren't very many
survivors," Mr. Leuthold warns.
Consider the biotech stocks. A few, such as Amgen Inc., rebounded
quickly from their 1992 collapse. But they were the exceptions. Other
early stars, such as Xoma Inc., survived the debacle, but never returned to
their peak prices.
"In biotech, there were numerous one-technology companies whose
technologies didn't pan out," says Larry Feinberg, managing partner at
Oracle Partners, a hedge fund in Greenwich, Conn. (which isn't related to
software company Oracle Corp.). Something similar is true of many
Internet companies. "The analogy, from a fundamental viewpoint, is that the
industry has to be rationalized and developed," he says. "You get this wave
of enthusiasm and then investors realize that they have shot too far in one
direction."
Morgan Stanley software analyst Chuck Phillips has a name for this
phenomenon: the "classic technology hype cycle." The cycle, as he
describes it, has three phases: a "frenzy and land grab," followed by a slow
maturation of the technology, during which the stock-market euphoria
cools off, followed by "the production phase," when the real benefits of the
technology kick in, a few clear winners emerge and the market gets excited
again.
Many modern-day tech investors reassure themselves that tech companies
will do better than past bubble victims, because today's companies are
leading a wave of revolutionary change that will transform society for years
to come. Sadly, one of the most painful lessons of the past is that bubble
companies often are involved in a revolutionary technology. That doesn't
prevent their stocks from crumbling once they get pushed up too far.
Visionary technologies and ideas have been coming and going for
centuries, in fact, leaving stock disasters in their wake. In the 18th century,
the promise of foreign trade excited Britain. An outfit called the South Sea
Co., given a monopoly on trade with the Spanish Empire, soared on
London's stock market. Trade eventually did make fortunes for some
people, but not for the South Sea Co., which became a disaster dubbed
the South Sea Bubble and helped throw the British economy into a slump.
After Charles Lindbergh piloted the Spirit of St. Louis across the Atlantic
in 1927, proving trans-Atlantic flight was possible, airline stocks took off.
Few survived. One company that saw its stock soar, Seaboard Air Lines,
was in reality a poetically named railroad.
So, too, today. Though his company is expected to post sales of around
$3.5 billion this year, Amazon.com Inc. founder Jeff Bezos frequently has
warned investors that it isn't yet a lasting company -- and may never
become one. "The track record of innovators is not good," he has said.
He is right. Visionaries aren't always good managers, and the
much-heralded "first movers" can lose out to companies that get the kinks
out of great ideas.
Look at what happened to the creators of modern database software in
the late 1980s. A host of start-ups went public -- with names like Informix
Corp., Ingres, Oracle Corp. and Sybase Inc. -- promising to change the
way information is stored. Their products allowed customers to find and
manipulate data easily, using plain English commands. Orders rolled in and
the stocks soared. But the software, riddled with bugs, began crashing,
and so did the software makers' stocks.
By 1991, Oracle was losing money. Its shares plunged to single digits,
shaving more than 80% off the nearly $4 billion market value it had as of
mid-1990. The company was forced to take on an $80 million loan from
Nippon Steel Corp. because no bank would lend it money. Oracle
survived, in part because it brought in additional managers to help
implement founder Lawrence Ellison's vision. A decade later, Oracle's
market value is north of $105 billion.
And Oracle's rivals? Informix and Sybase today have market values of less
than $2 billion each. Ingres was acquired by Computer Associates
International Inc. in 1994 for about $300 million. Since the intervening
decade, of about 2,000 other software firms that went public, just 417
exist as independent companies. The rest either were acquired or went out
of business.
There are some reasons to hope that a tech-stock recovery may happen
faster than has been the case after past bubbles. Apart from the
government riding to the rescue with interest-rate cuts and a possible tax
cut, a more fundamental reason for hope is that technology's life cycle is
shortening. That means equipment is becoming outdated far faster than in
years past. Like it or not, companies that want to keep up with changing
markets have no choice but to buy new gear all the time.
An example is Intel Corp., the world's leading chip maker. Though chip
demand has dropped off, Intel plans to spend $7.5 billion this year on new
manufacturing equipment, an increase of about $1 billion over last year.
Intel has the equipment to produce chips with very high processing
capacity, but those technologies are rapidly becoming stale. Intel's
latest-generation Pentium IV chip is built to operate best at an even higher
processing capacity, and that requires expensive new equipment. In
another four or five years, on average, that new manufacturing equipment,
too, will become outdated.
Contrast that with the 1920s, which witnessed revolutions in
transportation, telecommunications and manufacturing. Unlike today's
equipment, with a lifespan of just a few years in some cases, manufacturing
plants constructed during the 1920s were supposed to last for decades.
"With information technology, you can make huge investments now, but
basically three years from now it's depreciated to almost nothing," says
Peter Garber, a global strategist at Deutsche Bank and a professor of
economics at Brown University. "Because of innovations in hardware and
innovations in software, information technology just evaporates."
So tech companies will continue selling gear, perhaps at a faster rate than
utilities sold electricity and PC makers sold computers when their stocks
were declining. What no one knows is whether the demand will be strong
enough to make today's tech stocks start to rebound sooner than those of
yesterday.
"Things happen quickly today, so it wouldn't amaze me if it [a recovery]
happened in two or three years," says Mr. Grantham of Grantham Mayo.
Still, he adds, "history says that the great bear markets take their time." |
