From Silicon Investor: The Informed Tech "Investor's" Destiny with Gamblers Anonymous: A Broker's View

May 8, 2000

Ten years in the securities business does not make one an expert, but when something does not feel right, you know it. Being a proponent of fundamental analysis and the theory that historical averages will eventually revert towards their mean in periods of excess, it is clear to me that in today's environment the thirst for instant riches has made even the most conservative individuals turn into race track gamblers.

Where investing was once associated with research and due diligence, along with identifying good risk-to-reward prospects, the shift to compulsive and irrational behavior has been encouraged by the mainstream media and the analyst community. This "touting" is being done regularly by our so-called "experts" without once thinking about their fiduciary responsibility to the general public. Witness the tossing out of absurd price targets, many done on a daily basis, often linked to the most recent tech conference covered by CNBC as if it were the countdown to the Final Four.

The few highly respected voices of reason left today - who I believe have correctly identified this as the greatest stock market bubble in history - have been taunted and chased away because they did not play the numbers game. Unfortunately, they will also be given the "broken clock is right twice a day" treatment when they are proven right. Their advice to lighten up during the parabolic rises most likely will never be quantified in dollar terms.

This is an unfortunate fact, because it's hard to determine how much they have "saved" those who have listened and profited from the mania. In contrast, the "buy at any price" experts, who always seem to get off the hook for their recklessness and disregard for the outcome of their touting, always walk away with halos and million-dollar bonuses as long as they bring in their fees.

Even if you are a "new era" bull, it is no longer a market where "buying the dip" is a foolproof method for instant riches. Just ask those buying the darling tech stocks over the past few months. The whipsawing swings recently encountered have seen the Nasdaq fall from 5,100 to 3,200 in a few short days. This has put many investors who bought the top in a hole, which may take some time to recover, and in some cases many individual stocks may never come back.

That said, the real problem is that many of today's participants are late to the tech party, believing we are in a so-called "new economy" where stock prices eternally go up and they always come back.

Looking back, I can still clearly remember many high-profile analysts slinging 6,000 Nasdaq targets the day we broke 5,000, this coming on the heels of an absurd run from 3,000 a few short months ago. Now the same analysts who said buy at 5,000 are saying "Gee, we've fallen 30 percent. Buy some more!" What's amazing to me is that they have failed to notice or even once mention how far we have come in the past six years alone, and that a 50-percent retrace of that move is a possibility that could put us at 2,900 or less, "assuming" we are still in a bull market...

-- DeeEmBee (macbeth1@pacbell.net), May 08, 2000

Answers

The author goes on to discuss the strong similarities between current investing behavior and gambling addiction, as well as decrying the complete abandonment of any sense of fiduciary duty by analysts and other financial "gurus".

Recommended reading.

-- DeeEmBee (macbeth1@pacbell.net), May 08, 2000.

Thanks for linking this. I've been wondering what happened to the sobriety of earlier analysts.

-- Waiting (to@invest.com), May 09, 2000.

Yes, by all traditional standards the stock market is at ridiculous levels. But if this guy has been a "fundamentals" analyst for 10 years then he probably has missed significant gains for himself and his clients.

The "New Economy" can no longer be dismissed with a sneer. It has been around too long. It is not a natural impossibilty----new paradigms happen. Discontinuities, state-changes, non-linear systems are all very natural. Extraordinary economic breakthroughs occur with increasing frequency. Bio-tech, internet economies, energy production, genetics, on and on.

I'm not saying the bubble won't burst. I have hedged my bets. But I am saying that it might not burst. It might not even stop growing, at least for a long time. It's very possible that we are in a new ballgame. It's very possible that we are NOT in a new ballgame. I just don't rule it out.

A year ago there were many compelling arguments made for the interconnected economy being a house of cards and failing due to it's own complexity. Remember cross cascading defaults? (or was it cast cross-cading defaults) Y2k showed that we are not so vulnerable as we thought. The system is robust; it has many redundancies.

The concept of a paradigm change is not new. It has happened before---from hunter-gathering to agriculture, from agricultural to industrial, from industrial to information, from information to........? Paradigm changes used to be discrete events. Now they are becoming continual.

We are wealthy beyond all traditional measures. Even the poor have luxuries that were not imagined 100 years ago. It's not a foregone conclusion that the economic bubble will break. It may be just be beginning.

-- Lars (lars@indy.net), May 09, 2000.

This is a good post and I like it. Thank you.

-- Maya (Maya@eck.ist), May 09, 2000.

Lars -

Extraordinary economic breakthroughs occur with increasing frequency. Bio-tech, internet economies, energy production, genetics, on and on...

You cite technological breakthroughs, not economic. The "New Economy" seems to me to be primarily a media catch-phrase, first used by periodicals like Business Week and Wired and later picked up by mass media and politicians. The "New Economy" argument espouses the view that innovations like those you mention have fundamentally changed personal and business productivity and the rules of market economics. Many, many economists (e.g, Alan Blinder, Milton Friedman, and Paul Krugman, to name but a few) beg to differ and have "run the numbers" to show that our recent successes and current "market bubble" differ very little from past experiences.

Paul Krugman wrote a very interesting critique of a "New Economy" essay by Stephen Shephard of Business Week: Speed Trap: The fuzzy logic of the "New Economy". Those productivity numbers that get bandied around aren't as well supported by the data as one might think.

Just as a side note:

Until I did some serious reading about the 1920's, I never understood that line in the movie "It's a Wonderful Life" to the effect that "It's gonna be bigger than radio." Back then, radio was supposed to completely transform everyday life and make everyone rich beyond the dreams of avarice. Then came 1929, and now pretty much all that's left is RCA and drivetime DJs.

Information technology is truly wonderful, and I've been in the industry since the "birthquake" back in the early '80's and have seen and appreciated much of the good wrought by the "digital revolution". However, I think the initial development of antibiotics, the long-distance telephone system, and the US superhighway project have made much more difference to our lives than the Internet ever will. No one has argued that any of those innovations created a "New Economy". The rules have not changed. Tech stocks have gone up in the past few years because of belief, hope, and speculation, not analysis. The market really took off in late 1999 because of "easy money" released to buffer possible Y2K impacts and "market analysts" throwing around ludicrous price targets like so much candy. Now the Fed has to address the resultant inflationary pressures and they will do whatever is necessary to cool things down, because inflation is far more corrosive to the economy ("Old" or "New") than any other factor.

-- DeeEmBee (macbeth1@pacbell.net), May 10, 2000.