Bubble bubble .... ... ....... - courtesy Slate Magazine:
Charles Kindleberger's Manias, Panics, and Crashes is the most
important book ever written on the subject of investment bubbles. In
it, Kindleberger catalogues the rises and inevitable falls of
various investor favorites throughout history, ranging from tulip
bulbs to shares in the South Sea Company to RCA stock in the 1920s.
If Kindleberger ever updates his book, he should add a whole chapter
about last week in the U.S. stock market, which offered a series of
resonant--and painful--examples of investor self- delusion.
The delusion, of course, was all about the Internet, and the
so-called dot.com companies. eBay's stock exploded, Earthweb went
public and rose more than fourfold, and Theglobe.com, a company with
$1.7 million in revenue, saw its stock price jump from $9 a share to
as high as $97 a share in one day before closing at $63 (a tidy 600
percent rise). But the strangest story actually belonged to a
company without .com at the end of its name, namely tiny Internet
service provider Avtel Communications Corp.
On Thursday, Avtel issued a press release announcing that it was
introducing ADSL service (asymmetric digital subscriber line) in
downtown Santa Barbara. For downtown Santa Barbarians, this was good
news. ADSL is a way of accessing the Internet that offers blazing
speed and the ability to access the Net and talk on a phone
simultaneously. Although you need an ADSL modem and your local phone
company has to have ADSL technology available, the service works
much better and faster than ISDN. Next year is expected to be the
year in which phone companies around the country introduce ADSL as a
common feature.
But while Avtel's news was important to the people who were now going
to be able to find out what a T-1 line was like without having to
pay for a T-1, it hardly seemed to be big news to anybody else.
Avtel doesn't own a patent on ADSL technology, and it doesn't
manufacture ADSL modems. And the company didn't pretend that any of
those things were true. But it didn't matter.
In the best example yet that a sucker is born every minute, investors
piled into Avtel last Thursday, sending the stock from $3 a share to
$13 a share by mid-day. Avtel had something to do with the Internet.
What else did you need to know? Then the day traders, momentum
players, and fools jumped in en masse. By the end of the day,
Avtel's stock had risen from $3 a share to $31.
That's right. If you were an Avtel shareholder who went bowling all
day Thursday, when you came home your shares were 1,284 percent more
valuable than when you woke up in the morning.
At that point, the Nasdaq stepped in, and actually halted trading in
the stock all day Friday until Avtel could clarify its first
release. It did so, in unusual detail, explaining how much its
service would cost subscribers (somewhere between an extra $70 and
$240 a month, not unreasonable for heavy Net users) and stressing
the fact that the service had been rolled out only in one three-mile
section of Santa Barbara. The company also said that published
stories to the effect that Avtel had plans to introduce the service
nationally were mistaken, the product of confusion between Avtel's
ADSL service and a new Internet-access business the company is
taking national.
The thing about this story is that it is not the tale of an Internet
company tricking the public into buying its shares. While the
initial Avtel press release is stylistically hyperbolic, it clearly
stated that the service was only available in Santa Barbara, and
that the only firm plans for further roll-out involved two other
California towns. ADSL is not some radical new technology. Every
major Bell company has plans to introduce it in some form in the
next year. So Avtel didn't mean to trick anyone.
That's why this is such a wonderful (or sad) story about
self-delusion. There's no way anyone who bought this stock at $15 or
$20 a share could have been looking at the company's fundamentals.
They couldn't really even have read the press release. They were
trading purely on momentum. In that sense, what happened with Avtel
is not very different from what's happened to the dot.com stocks,
with one important distinction: The Nasdaq stepped in and halted
trading.
In doing so, the Nasdaq effectively slapped investors in the face and
said, "Wake up!" When Avtel's shares opened Monday morning, the
stock was all the way back down to $3, from its previous close of
$31. In the course of the day, the stock actually bounced all the
way up to $15, and then closed at $10 1/2, still a hefty 250 percent
leap from its Wednesday close, but perhaps not unreasonable given
its successful introduction of ADSL.
The curious thing to think about is what might have happened had the
Nasdaq not stepped in. Eventually the market would have woken up,
one presumes. But as last week demonstrated, we are living through a
moment in which manias have become almost common occurrences, in
which ignoring anything resembling fundamental analysis has become
conventional wisdom. In the case of Avtel, the consequences are
insignificant (except for those who bought at the peak). But the
continuing saga of Internet mania raises broader, and more
troubling, questions about the market's collective rationality. In
the land of the blind, the one-eyed man may be king, but are there
any one-eyed men left?
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