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All bets are off in
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January 17, 1999
Internet stock
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December 29, 1998
Local online
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December 04, 1998
Clinton unveils
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November 30, 1998
No fitting rooms
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September 13, 1998
E-commerce
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Retailers
September 13, 1998
Escrow is a way
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August 17, 1998
Search-engine
firms hunt growth
May 06, 1998
ALL BETS ARE OFF IN
INTERNET BOOM
Investors' confidence may be what's most
inflated
By Bill Barnhart
Tribune Markets Columnist
January 17, 1999
A woman phoning a late-night radio talk show
expressed precisely the frustration nagging at
many investors these days:
"You can go to a broker or a financial
planner and you sit down and talk to them,"
she told host Milt Rosenberg on WGN-AM's
"Extension 720" program a couple of weeks
ago. "I'm in my mid-50s and, yes, I certainly
want to be somewhat conservative. You give
them a nice little chunk of cash, and they're
very conservative. The portfolio just bounces
around and does very little.
"On the other hand, you (could) buy 100
shares of Amazon.com, which every broker
will tell you is just riding on air, and you feel
like a fool if you haven't participated."
The Internet stock craze, said by Wall Street
experts to be the greatest stock price bubble in
memory, has made a lot of money for a lot of
ordinary investors.
Shares of Amazon.com, one of the more
substantial Internet companies--despite its lack
of profits or prospects for profits in the near
future--more than tripled in the month
between early December and early January.
If you had borrowed from your aunt or your
kids' college savings account to buy 100
shares of Amazon.com on Dec. 4, you would
have paid $18,250 at the low point of that
day. If you had been lucky enough to sell at
the intraday peak on Jan. 8, you would have
pocketed a profit of $41,487.50, minus
brokerage expenses.
That's nothing compared to the gain enjoyed
by longer-term investors who bought
Amazon.com a year ago at a split-adjusted
1998 low of $8.25 per share--a 24-fold
increase in 12 months. In hindsight, who
wouldn't have thrown in a little mad money?
Compared to other buying crazes that grip the
stock market occasionally, there is nothing
new in Internet stock mania, except the fact
that for many investors, the Internet is the
means of investing as well as the end.
Clearly, the business outlook for
Amazon.com's on-line retailing ventures is
not 24 times better now than a year ago. Nor
will its business prospects be 24 times better a
year from now. But such analysis is irrelevant
as well as bogus, no matter whether it comes
from venerable Wall Street brokerages or
on-line chat rooms.
Borrowing a metaphor from economist John
Maynard Keynes, think of Internet stocks as
entrants in a beauty contest. No one can
objectively define beauty; nor do the
contestants become more or less attractive
over the short-term course of the event. All
that matters and all that changes are the
convictions people develop regarding who is
the favorite.
With a finite number of shares available in
each Internet company, the secret to winning
in this or any stock market craze is predicting
early in the contest which company will be the
favorite of fellow investors.
Given the indiscriminate and largely
uninformed buying of Internet stocks in
recent months, investors appear to be flocking
to the vague Internet concept, not to a
particular stock. To some extent, the beauty
contest is between Internet stocks as a group
and other opportunities for investing and
gambling.
Nonetheless, most investors prefer to place
their chips on individual stocks and not a
blander, diversified portfolio of Internet
stocks. In either case, company research is
pointless in a bubble market.
"There is no use asking yourself what is the
product and what are the earnings estimates,"
said Jay Patel, assistant professor of finance at
Boston University.
Investors evaluate themselves, not companies.
They decide that their intuition, expertise,
confidence, gut feeling--call it what you
will--is superior to other investors' in picking
winners and, just as important, in guessing
when the contest will end.
In a survey cited by Patel, 80 percent of
automobile drivers considered themselves
above-average drivers, while, of course, only
50 percent could actually be above-average.
The human tendency toward overconfidence
explains the Internet craze better than any
facts or predictions about the Internet
phenomenon or individual companies.
Overconfidence among investors is hardly a
"new paradigm"--the loose term used by
Internet stock promoters.
But belief is well-grounded that a
survival-of-the-fittest process accompanies the
introduction of technologies or new business
concepts, said Alfred Kugel, investment
strategist at Stein Roe & Farnham. Dozens of
manufacturers competed in the early days of
the automobile, he noted, but only three giant
U.S. corporations survived into the modern
era.
"Over 40 years, I've seen emotional surges in
all kinds of stocks," he said. "People should
put their race track money into Internet
stocks."
Austan Goolsbee, assistant professor of
economics at the University of Chicago
Graduate School of Business, said the mania is
not entirely baseless and that there is a grain
of rationality in investor confidence.
"Just because 95 percent of Internet
companies in the end could be worth nothing,
there is still the small probability that
somebody is going to be the Wal-Mart of the
Internet, in which case the most outrageous
valuation (of the company's stock) would be
too low," he said.
The relatively low cost of entering the
electronic-commerce business, as opposed to
manufacturing automobiles, suggests that the
body count of failed Internet companies will
be high. Indeed, the surviving companies may
not even be incorporated yet.
Professional stock underwriters know this
when they assign what appear to be
ridiculously low values to initial public
offerings of Internet stocks in the midst of a
market boom. But they also know their
customers like the early leap that Internet
IPOs typically experience after underwriters
set the bar low.
On Friday, Marketwatch.com, an on-line
business news joint venture between CBS
Corp. and Data Broadcasting Corp., soared to
$130 from the $17 a share IPO price assigned
late Thursday by underwriters led by BT
Alex. Brown. As the first Internet IPO of
1999, 2.75 million shares opened at $89 and
closed at $97.50 on its first day of public
trading, with first-day trading volume of 9.8
million shares.
Internet companies needing to tout rosy
growth scenarios despite mounting internal
losses require constant infusions of new cash.
Zooming share prices in the stock market do
not directly translate into cash for the
company that issued the stock.
When more money is required to finance
ambitious growth stories, the cold judgment
of professional lenders and underwriters
regarding a company's actual prospects could
be a reality check against the euphoria of
less-informed individual investors, although
underwriters, just like amateur investors, try
to assess what price the market will bear.
A second potential reality check is the Internet
service itself. In recent days, breakdowns
have plagued on-line brokers overwhelmed by
orders from amateur investors climbing
aboard the Internet bandwagon. This
development threatens to undermine the
Internet stock boom as much as failures and
disappointments certain to be disclosed by
Internet companies themselves.
Currently, opportunities for contrarian
investors to bet against the Internet stock
craze are inconvenient and expensive, thereby
helping expand the bubble.
Goolsbee was able to short an Internet
stock--that is, sell borrowed shares in hopes
of a price decline--only after he stood up in
his faculty lounge and challenged colleagues
to lend him some of the hot shares.
The very fact that the Internet is new compels
investors to suspend their normal
decision-making process.
"You are buying an option on a brave new
world, the information superhighway, or
whatever you want to label it," Patel said.
"You wind up convincing yourself things are
what other people say."
But to convert your paper profits to cash, you
must find the next person willing to believe
what you say. |
