Commodities, not stocks.

I Find Karma (
Thu, 7 Jan 1999 11:19:51 -0800 (PST)

Someone on fork wrote:
> I've sold all of my shares of MSFT, INTC, and CSCO, as I think
> Internet mania will bring these companies down, too.

Dow 9500, I'm amazed to have seen you already.

That said, I'm really not convinced the Internet bubble is going to pop
anytime soon. The reason, simply put, is the high number of new people
getting online brokerage accounts -- thousands of new accounts per day.

Many of these people are not Economist readers, and they know little of
fundamental valuations. They know very little of technical analysis,
too, mind you -- all they know is a few hundred companies they've heard
of, plus things they've heard from friends and on television.

The large caps. And, increasingly, because they use the Internet to
trade stocks, also the Internet companies.

So they get online because everyone is telling them that there are so
many useful things online. And they get their online brokerage
accounts, because *everyone* is telling them that investing their money
is a far better way to appreciate their wealth than just saving it.

And they buy a company they know. Coca cola. Ford. Schwab. Apple.
Microsoft. Intel. Cisco. Dell. America Online. Yahoo. Amazon.
eBay. And their buying these companies, combined with the instutitional
investors doing nothing but holding the companies they already owned,
makes the prices of the respective stocks go up. Most of these people
don't know what the market caps of these companies are, and they don't
care. All they know is that they want to own part of a company they
know. And when they do buy a company like Microsoft or Amazon and the
share price appreciates considerably (MSFT was up 120% last year alone,
AAPL was up over 200%, AOL 500%, YHOO 700%, AMZN 1000%!), they tell
their friends and family.

What we're witnessing is an incredible pyramid scheme where the thing
that causes the bubble -- the Internet -- *IS* the medium by which the
participants of the pyramid do their gambling.

The bottom line: the stock shares of these companies trade not like
STOCKS but like COMMODITIES. There is a limited supply of shares out
there -- Microsoft only has 2.5 billion shares, Amazon has only 158
million shares, etc. Actually, that's just the number of outstanding
shares -- if you take out all the institutions and insiders who own
shares, the effective floats of these companies are much, much less.
And the thing that every fledgling economist learns is supply and
demand: if there are only 20 million AMZN shares in the float available
for trading, and each of 3 million Amazon customers wants to own 100
shares of AMZN, what do you think is gonna happen to the stock price?

The thing to remember is that the number of entrants into the Internet
is going to appreciate for the foreseeable future. The Internet is not
a fad, perriod. And so the cycle continues to repeat itself.

Meanwhile, there's another group of people who are smart enough to know
this is a bubble but stupid enough to think they can profit by shorting
stocks like MSFT, INTC, CSCO, DELL, AOL, YHOO, and AMZN -- or worse,
some of the lesser known Internet stocks. The problem with this is when
you pair it with the phenomenon of the number of Internet brokerage
accounts increasing. More people get online, more people open
investment accounts, more people buy the companies they know, the prices
of shares of those companies rise, and sooner or later these idiots who
short the companies get "squeezed" -- a margin call from their brokerage
accounts means they either have to put up more money to stay short, or
cover the short by buying the stock at the current price. What's
amazing is that this keeps the stock price rising, which in turn causes
new people to want to short at the new stock prices. Heck, if the
prices were way too high before, they're certainly too high at levels
even higher, right? And the cycle repeats.

So the price appreciations of MSFT, INTC, CSCO, LU, DELL, AAPL, IBM,
AOL, YHOO, AMZN, etc etc etc -- though I believe they do represent a
mania with all of the bad connotations that word has -- will probably
not stop as soon as we think. What needs to happen to make the bubble
burst is: 1) conditions get better in the rest of the world so
international capital finally flows out of U.S. stocks and into
countries that need the money for actual growth (imagine that), 2) the
number of people getting online starts to slow down (and we know this
isn't happening anytime soon), and 3) something happens that finally
stops people from shorting these high flying stocks (how likely is it
we'll see regulation attempts in this anytime soon?).

Until then, I really expect the stock prices of the high fliers to keep
appreciating. And in one sense, this is a really sad tulip craze. In
another sense, though, it is the best thing that could happen for
humanity: the flight of capital into technology stocks in particular
means more investment in technology, which ultimately will give humanity
many more great advancements. This is not a mania like tulip bulbs
or even precious metals where people are buying things that are
essentially useless in and of themselves. This is a mania where people
are buying the right things for the wrong reasons, and the flight of
capital into technology is gonna make technology improvements come
bigger, better, and faster than they might have otherwise.

Anyway, that's just my opinion, I could be wrong...

Whoops, Yahoo's market cap at $36 billion is now bigger than Sprint,
CBS, and Seagrams, to name three examples. Yahooooooooga! Heck, at $22
billion, Amazon's market cap is bigger than Seagrams, too. Amazing!
And it will be interesting to see what comes next... will they use some
of their newfound paper wealth to buy other companies and start new
ventures? If they're smart, they will. Koogle and Bezos are smart
people. So, we'll see...


intumesce, v. intr.: 1. To swell or expand; enlarge. 2. To bubble up,
especially from the effect of heating.