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The Biggest Bubble There Ever Was
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Most bubbles that financial history has seen have been associated with some new technology or with some new business opportunity. The internet was associated with both.
The internet represented new technology and it also promised a new business opportunity which promised to revolutionize the way we purchase goods and services and consume information.
According to a lot of financial analysts (and im not talking about the kind of showmen you see on your average CNBC/ NDTV) have recorded the period of the Internet Bubble as a period where one saw the largest creation and largest destruction of wealth of all time.
When the Internet Bubble decided to pop – over $8 trillion of market value evaporated. According to pretty accurate estimates – that’s a year’s output of Germany, France, England, Italy, Spain, Holland, and Russia combined! (I find it quite disturbing – the way we use the word ‘billion’ and ‘trillion’ so loosely. It makes the difference between a 100 and a Billion look so miniscule)
So what are the core reasons for such bubbles? Are we likely to see such bubbles? What were the companies that went bust in the Internet bubble on Wall Street thinking? What was the social scenario? Who fuels these bubbles?
These are some of the questions that I am going to attempt to present and hopefully the cases that I research will give you answers that are self explanatory.
So how does a Bubble Start?
According to Robert Shiller, the author of a book called Irrational Exuberance (fabulous book by the way) a bubble starts due to “positive feedback loops”. A bubble starts when a group of stocks, in the case we are covering, those associated with the Internet, begin to rise. This upward movement encourages more people to buy the stocks, which causes more TV and Print Coverage (Financial Pornography anybody). The successful investors will tell you at cocktail parties how easy it is to get rich, which pulls in larger groups of investors and causes the stocks to rise further. But the whole mechanism is quite flawed. It’s about finding the greater fool. So one investor buys and looks to sell to a greater fool than him and that process continues till one can’t find a greater fool in the market and the bubble bursts.
It’s all about finding credulous investors.
This kind of chatter often diverts attention away from the intrinsic value of stocks (which in the long run will decide the dividends they reap for investors). The chatter is often fuelled by the media which critics say engages in ‘Financial Pornography’. With the rapid evolution of online investing, financial journalism (the advent of 24 Financial News Channels and online financial journalism), and stock bulletin boards viewers need to be wary of financial or investment pornography. Pornography can be defined as the depiction of acts in a sensational manner so as to arouse a quick intense emotional reaction[1].
It really is difficult to draw the line on what exactly is financially pornographic content and what isn’t. Some examples of financial pornography are articles that give you ‘tips’ to “Double your money in 10 days”, “Top 10 funds to buy now”[2], personality profiles of certain stock brokers that read like fan magazines and the likes. Titillation in its least obvious form! There seems to be an obvious manipulation of mass psychology by financial media networks in tandem with stockbrokers and certain mutual fund houses.
(PS I also have some issues with certain Web 2.0 based blogs, websites etc claiming to ‘know all’ about the industry [in investment parlance at least] and regularly posting articles with respect to movement of stocks on the market and giving subliminal ‘tips’ to their readers. If India is ever to experience such a bubble in the scale that the US witnessed, those blogs/ websites are likely to be the most notorious culprits who fuel it)
In the US, it was not just the media that lost its footing during the Internet bubble. Even financial analysts whose main job is to determine the intrinsic value of stocks lost their sanity (or their values as well maybe). More on that in the next post.
I’ll leave you with a line to think about for the day:
“…waves of optimistic and pessimistic sentiment are unreasoning and yet in a sense, legitimate where no solid base exists for a reasonable calculation.”
- John Maynard Keynes
(PS: I know there isn’t much ‘technology’ in this post but there will be a lot of that later. I sincerely hope you enjoy it)
[1] Oxford dictionary
[2] The Four Pillars of Investing, William Bernstien, McGraw-Hill, 2002, p. 220
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> “.. the way we use the word ‘billion’ and ‘trillion’ so loosely. It makes the difference between a 100 and a Billion look so miniscule”
A trillion is a 1000 billion
Ahh - haha i actually meant between a 100 as in Rs. 100 and a trillion as in Rs. 1 trillion almost seems miniscule because we as a population are now so used to superlatives
Harshil.Would like to see more on these lines.However, I would like to say that not only in the Internet industry, in any industry this is a similar cycle. Remember Iridium ?Although it was single project, the scale itself was enough to call it a bubble. But frankly speaking, do you think there is a way out? I mean, we have to keep trusting the newer innovations. We have to keep expecting more from newer applications and discoveries. And with newer (and yes, higher) expectations, will come an attached higher (notional) value. There is no escaping this. So, ultimately, we might find out that Facebook is not worth $15 billion, but then, something else would.I would be interested to read about the signs that a particular technology/platform/business is moving towards Bubbledom (or Bubblegum!) rather than a judgmental post (which, this even one was not). Waiting to see your views on this whole scene.