Yesterday I lauded a book called Extraordinary Popular Delusions and the Madness of Crowds. Tomorrow I will post the highlights for you to read at your leisure. Today let’s talk about tulips. Are tech stocks today’s tulip bulbs?
No — for the simple reason that tulips serve no enriching economic purpose, whereas an invention like the wheel or electricity or the Internet does. Tulips never had any chance to improve the world economy. The Internet is improving it profoundly.
So in that sense, the craze for Internet-related stocks is terrific. It’s great — for consumers — that capital is so readily available to build this amazing new world. Whether it will be great for most investors taking the plunge at these levels I tend to doubt. Did the inventor of the wheel get so terribly rich? Did investors in the early automobile companies — or the later ones, for that matter — get so terribly rich?
Over the long run, it’s likely that only a few of the hot companies that have been bid into the billions will prove to have been bargains. (A larger group will prove to have been great buys at their first-round venture valuations, and at their insider IPO prices — but even that group will be small compared with the group that will have fallen by the wayside.)
What’s worrisome about today’s mania, to the extent it is a mania, is how not long-run much of the investing is.
Reader Aron Roberts sent me an excerpt of a speech by Vanguard’s John Brennan last Friday, “in which,” Aron writes, “he cited some amazing figures that would not appear to be all that far removed from the [tulip] frenzy.”
“Significant numbers of individual investors have turned from long-term investing to trading. Their horizons have shortened from decades to days. Consider that the average share of Amazon.com is held for seven trading days before being sold to someone else. The average holding period for Yahoo! is eight days. For Priceline.com, it is only 72 hours. And these ridiculously short holding periods are not found only in Internet stocks. The average share of Dell Computer changes hands every three-and-one-half months. Shareholders of Microsoft hang on to their issues for about seven months on average — practically an eon in today’s upside-down world. . . . The magazine from which I drew these statistics questioned whether blue chips were becoming poker chips. Last year, 76% of the shares of the average company listed on the New York Stock Exchange turned over. The figure had risen to 82% through May of this year.” — John Brennan
To a certain extent, the faster turnover may be explained by the lower barriers to turnover. In the old days, it cost a fortune to trade 300 shares of stock, both in commissions and taxes. Today, the commissions can be tiny, and the gains are often tax-sheltered within retirement plans. Today, too, it’s just so much easier. The impulse strikes us and — click — we’re in. Click, we’re out.
Crank, the one-armed bandit spins. Crank, it spins again.
When stock in a company with $66 million in earnings is selling at 681 times those earnings (ya-HOO!!!), a lot has to go right. And this is a stock that’s down 25% from its peak. Think of all the high-flying companies that have no earnings to multiply by. Many of them never will.
So is it tulips? No. We’re building a great new, convenient, efficient global economy. But is it a bit tulip-like? Well, sure.
Tomorrow: The book — and Dow 36,000?
Quote of the Day
To think that distasters only happen to someone else is human nature. But, when human nature runs into mother nature, regret normally follows.~CBS hurricane specialist Bryan Norcross
Request email delivery
- Feb 22:
Corruption On A Scale Never Previously Imagined
- Feb 21:
What A Field!
- Feb 20:
And Yet You Still Don’t Turn The Lights Off When You Leave The Room
- Feb 19:
Power Walking With Chris Christie
- Feb 18:
The Inspiration YOU Need?
- Feb 15:
NYC. UK. Canada.
- Feb 14:
If Republican Officials Go To Prison . . .
- Feb 13:
The National Butterfly Center Is Taking A Stand
- Feb 12:
Home-Schooled For Christ. And Pence.
- Feb 11:
Russian TV Thanks The GOP (And Don’t Miss Bill Maher)
- Feb 22: