Bubble, Bubble

The capitalist system, loathe it or hate it, it seems that we’re stuck with it. Even Karl Marx dabbled in stocks and shares. So did I, once.

In the Internet boom of the late 1990s, you couldn’t avoid the daily news about shares in new “dot-com” businesses soaring. I was playing an on-line “game”, in which you used virtual money to buy imaginary shares, but based on the prices at which the real shares were trading. I’d spend ten or fifteen minutes in my coffee break each morning.

With the general upward trend in the market, it was easy to make money. Any given stock might not trend upwards relentlessly, but, on average, a simple and effective process worked well: spotting a fast-increasing one, buying it one day and selling it a day or two later when the rise seemed to be levelling off.

Within a couple of weeks, I realised that with fifteen minutes “work” a day, I was making more than my actual salary. Of course, it wasn’t real money, but since everything was based on the real market, there seemed no reason why the exact same process couldn’t work for real.

gold rush candyI took my savings of three thousand pounds of real money and invested equal amounts into three companies. I like to think I wasn’t naive, unlike many private investors at the time. There were clearly some “dot-coms” whose business model was absolutely bonkers. There was boo.com, for example, which famously burned through £125 million of investors’ money in six months attemping, and failing, to set up an on-line fashion store.

No, following the dictum “in a gold rush, you can make a fortune selling shovels”, I invested in Internet infrastructure companies, not fly-by-night schemes. I bought a thousand pounds of stock in each of: a small Internet Services Provider; a company providing technology for secure e-commerce, and finally, a media and advertising company that had substantial “traditional” business as well as its Internet activities. I even checked the valuation of the companies in shares against their assets and revenues to make sure that the shares weren’t unrealistically high.

You’ve probably guessed where this is going. Within a very short time of acquiring my shiny new shares, the market crashed, the bubble burst, and I learned an interesting new fact: investors wouldn’t recognise a shovel if you hit them between the eyes with it. Or to put it another way, my carefully-chosen infrastructure companies were treated exactly the same as the loony dot-coms like Boo. In the panic, everyone was selling, and the prices plummeted.

Within a couple of weeks, my shares in the first two companies were worth literally a hundredth of what I’d paid, with the other, although kept afloat by non-Internet business, still well under half. Given how little of my money I’d get back, there seemed no point in selling. Surely, over time, the values of the companies would return to a figure that actually represented the worth of their assets and business.

That turned out to be the wrong decision too. With their share price devastated, the companies couldn’t raise capital to keep themselves in business, even though they might still have a workable business plan. The first two went bust, with shareholders getting pennies after the creditors were paid off, and the third firm was bought out at a rock-bottom price by a larger competitor.

But it seems that some investors have shorter memories than I do, because a new dot-com bubble seems to be boiling up. Some high-finance shenanigans earlier this year put the value of Facebook at fifty billion dollars. At 25 times its annual revenues, that’s way, way above any traditional model of valuation of companies that, you know, actually own stuff and sell stuff. The owners of Twitter are suggesting that it may be up for sale for, oh, about ten billion. Its annual turnover is just one hundredth of that.

But, hey, Google bought YouTube for a hundred times its annual revenues. That’s turnover, not profits. YouTube loses a cool half billion every year.

Are you in? Come on, you’ve got to speculate to accumulate. Oh, and you wanna buy some tulips?

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