Historian finds tech bubble that didn't pop (180 years ago)(arstechnica.com)
arstechnica.com
Historian finds tech bubble that didn't pop (180 years ago)
http://arstechnica.com/tech-policy/news/2010/03/historian-finds-tech-bubble-that-didnt-pop-180-years-ago.ars
5 comments
Relevant link:
http://en.wikipedia.org/wiki/Railway_Mania
It popped all right. The largest players that survived were a sound investment. But then again, if you invested in Microsoft or Cisco in the tech boom, you'd be sitting pretty right now (I think; didn't check stock prices). Doesn't mean that it wasn't a bubble.
http://en.wikipedia.org/wiki/Railway_Mania
It popped all right. The largest players that survived were a sound investment. But then again, if you invested in Microsoft or Cisco in the tech boom, you'd be sitting pretty right now (I think; didn't check stock prices). Doesn't mean that it wasn't a bubble.
> if you invested in Microsoft or Cisco in the tech boom, you'd be sitting pretty right now
No you wouldn't. MSFT sits now at about a 20% discount to what it was in 2000, while CSCO is trading at about a third of the price it had in early 2000.
This is the defining feature of a bubble -- not only do the bad companies fetch exorbitant prices (there are plenty of those in any economy), but the good companies with valid business models also trade at prices that cannot be justified, meaning that no matter how well you pick the winners, you are still going to get burnt when the bubble bursts.
There were losers in the british railroad bubble in 1830's, but the ones who bought into the winners, did get out ahead. Meaning, the bubble never burst.
No you wouldn't. MSFT sits now at about a 20% discount to what it was in 2000, while CSCO is trading at about a third of the price it had in early 2000.
This is the defining feature of a bubble -- not only do the bad companies fetch exorbitant prices (there are plenty of those in any economy), but the good companies with valid business models also trade at prices that cannot be justified, meaning that no matter how well you pick the winners, you are still going to get burnt when the bubble bursts.
There were losers in the british railroad bubble in 1830's, but the ones who bought into the winners, did get out ahead. Meaning, the bubble never burst.
Dell stock from 1990 to now had an average return of ~30% per year. You could have lost money if you bought at the peak but it would have still been an awesome return over 20 years. So yes it's only worth ~200x you initial investment now vs. ~800x I don't think anyone who bought in 1990 really cares all that much. And it’s not just Dell Microsoft did the same thing as did several others.
PS: From 1990 to now the Nasdaq beat the Dow.
PS: From 1990 to now the Nasdaq beat the Dow.
Yes, dell has awesome returns from 1990 to today. We were not in a bubble in 1990. If you bought into dell between jan 1999 - august 2000, you are still in the hole by at least 50%, and possibly by up to about 70%. If you bought it at the peak, you were very badly screwed.
If you bought it in 1990, the correct investment decision would have been to sell it in late 1999-mid 2000 when it seemed to plateau, and possibly buy back in to it later. However you look at it, staying long in a bubble is always irrational. Even if the company performed miraculously before the bubble and will perform miraculously after it, you can only lose by holding it in the bubble.
(Of course, this predicates knowing when the sector is in a bubble. Which, suffice to say, is hard.)
If you bought it in 1990, the correct investment decision would have been to sell it in late 1999-mid 2000 when it seemed to plateau, and possibly buy back in to it later. However you look at it, staying long in a bubble is always irrational. Even if the company performed miraculously before the bubble and will perform miraculously after it, you can only lose by holding it in the bubble.
(Of course, this predicates knowing when the sector is in a bubble. Which, suffice to say, is hard.)
There are two definitions of a bubble you can look at the current value and say the point where the market started to over value the winners at which point dell, Microsoft, and Cisco where not in a bubble prior to 1997 and it only lasted around 2-4 years.
Or you can look at the bubble from the point where explosive growth started around 1998-1990 and died in 2000.
PS: Looking only at winners distorts the picture, so while MSFT was still undervalued (relative to its current dividend adjusted price) in 1996 there were also plenty of overvalued stocks in 1996 that tanked.
Or you can look at the bubble from the point where explosive growth started around 1998-1990 and died in 2000.
PS: Looking only at winners distorts the picture, so while MSFT was still undervalued (relative to its current dividend adjusted price) in 1996 there were also plenty of overvalued stocks in 1996 that tanked.
Most bubbles are good, just not for the people who buy in at the top. These tend to be "retail" buyers and so the least able to take the loss. But oh well.
The recent housing bubble is actually distinguished by its particularly useless allocation of capital. The tech boom gave us a number of healthy companies as well as useful infrastructure. The housing bubble gave us a stock of deteriorating future crack houses.
The recent housing bubble is actually distinguished by its particularly useless allocation of capital. The tech boom gave us a number of healthy companies as well as useful infrastructure. The housing bubble gave us a stock of deteriorating future crack houses.
To say most bubbles are good is incorrect. Bubbles depend on whether they are equity or credit-based.
Typically, credit bubbles are terrible for economies because they usually start in one area and spread, infecting the entire economy.
Equity bubbles on the other hand are usually well contained. When the dot com bubble popped, we didnt have banks collapsing and affecting other businesses.
Typically, credit bubbles are terrible for economies because they usually start in one area and spread, infecting the entire economy.
Equity bubbles on the other hand are usually well contained. When the dot com bubble popped, we didnt have banks collapsing and affecting other businesses.
Not so fast. When the equity bubble collapsed we were near deflation, which the Fed headed off with a generous credit policy that helped fuel the credit bubble.
If we had gone into deflation then, that would have been bad. (Not as bad as the cure may yet prove to be, but still bad and not well contained.)
If we had gone into deflation then, that would have been bad. (Not as bad as the cure may yet prove to be, but still bad and not well contained.)
Does it make sense, analytically, to say that there was a healthy railway boom in the 1830s and a bubble in the 1840s? It seems to me that most bubbles grow from a legitimate investment idea; the problem is that as more and more people bid for the securities in question, investors have trouble perceiving when the price has become too high.
I've got to believe that any truly revolutionary technology could be spun into a story of a bubble that "Didn't pop."
The printing press comes to mind as the most obvious example. Literacy ballooned after it, which led too the entire print medium, which in turn was necessary before anyone would have thought of electronic text, and the internet.
I think the key is that when a new underlying technology comes around, it doesn't pop. The bubbles created from people creative usage of that technology are what pops.
The printing press comes to mind as the most obvious example. Literacy ballooned after it, which led too the entire print medium, which in turn was necessary before anyone would have thought of electronic text, and the internet.
I think the key is that when a new underlying technology comes around, it doesn't pop. The bubbles created from people creative usage of that technology are what pops.
"America's Great Depression" by Murray Rothbard provides a good introduction to the Austrian Theory of the Business Cycle with a good historical analysis. Rothbard also covers alternative explanations of the business cycle. Even if you don't buy into the theory of the business cycle the book is worth reading just to learn just how involved in the economy Hoover really was.