Fool's Eye View

[ December 15, 1999 ]

Hisssss...

By Alan Oscroft (TMFAlan)

Have you got a snake in your pocket, or is that a puncture I hear?

Bournemouth, Dorset -- I've been thinking a fair bit about bubble psychology recently, while watching the surely exorable rise and rise of high technology company share prices.

There are many people out there who are convinced that the Internet-led high tech stock boom is a bubble that is waiting to burst, and nobody who reads a newspaper or watches the TV can have failed to notice the wailing and gnashing of teeth from bearish quarters everywhere. "It'll all end in tears, amid the acrid smell of digital conflagration," they cry. But are they right?

It is equally obvious, when a little logical deduction is applied, that there are even more investors who are still bullish about tech stocks and who are still piling into the market in the sure conviction that what goes up must go up further. If the technology bulls weren't in the majority, then the prices wouldn't be going up so fast.

If the direction of the stock market is the result of a democratic process, which of course it is, then it isn't a particularly efficient predictive democracy, at least in the short term, and shows all the agility of the Titanic when that iceberg first appeared hazily through the fog. And one blatantly obvious observation that can be drawn is that when a rapidly rising market does turn out to be an unsustainable bubble, it is the minority who were right.

But the minority aren't always right, and the bears are always bearish. So what keeps a bubble going strongly, and why do so many people seem to pile in just as the ground starts to disappear? And what evidence can we find of an approaching Big Pop?

The real driving forces behind the inflation of stock market bubbles are those two infamous human emotions, greed and greed. OK, it's just one emotion really, but it's such an important one, I thought it was worth saying twice. Actually, there really is a second emotion at work (but I wasn't going to let that stop me getting a Red Dwarf joke in) and that is jealousy. "A bloke down the pub has made 300% in three weeks, why should he have it and not me?" Anyone confess to having thought something along those lines recently? And that is what is drawing everyone and his dog into the tech stock boom.

I've read plenty of justification for buying techology stocks in recent months, and the reasons given range from the very Foolish to the utterly ridiculous. Good reasons are usually along the lines of "ARM will be the dominant designer of processor chips on the planet in 5 or 10 years time, so I'm looking for long-term growth and I don't care about short term ups and downs."

My favourite of the bad reasons for being in the high tech boom (and I've got no particular person in mind here, so please don't be offended if this sounds like you) is "because you can't afford to be out of it." That is complete nonsense and is a fine example of the "keeping up with the Joneses" approach -- you can't afford to be out of it because you'll look silly next to your mates who are creaming in the profits. If you can make ends meet and live comfortably without the tech stock boom, then you can certainly afford to be out of it.

Let's think about some of the classic signs of a bubble. Remember the bit about taxi drivers talking about nothing but the stock market and passing on their hot tips to anyone who will listen? The same goes for all manifestations of Joe Public really, and the last time I was in a pub in Liverpool (a couple of weeks ago) where the talk is usually about football, the talk was about buying shares. High tech shares. High tech penny shares, in fact. I was asked for my hot tips, of which, of course, I had none.

Towards the peak of a bubble, the number of ordinary punters having a go on the market usually rises dramatically too. I wanted to call my broker a few weeks ago to place an order (not for high tech shares, I must add) and it took numerous attempts over more than 24 hours to get through. I was not well pleased with the service, and resolved to look for another broker. But it wasn't their fault really, and it turns out that all telephone brokers have been suffering from the same problems, caused by a huge increase in demand. The number of private investors buying shares has doubled from the beginning of November, apparently, and most of the newbies are going for high tech stuff.

Twitchiness and short-term volatile reactions to no real news at all also characterise the frothy phases, and the last couple of days has shown serious twitches in UK technology share prices in response to nothing more than a small fall in the NASDAQ.

Does a downward movement in the NASDAQ alone mean that Freeserve (LSE: FRE) is now worth 28% less than at its peak about a week ago, that eXchange Holdings (LSE: EXC) is worth 20% less over a similar time, or that Flextech (LSE: FLXT) is worth 22% less? Of course it doesn't, but it does suggest that there are people who have bought into the high tech market for reasons other than those based on rational analysis, and we must ask how many of today's technology companies really deserved their high prices in the first place.

One thing that is for sure, at least in my opinion, is that the really great high tech companies will still be around five years from now, and at least some of their high share prices will be sustainable on a long-term basis (inevitable short-term volatility notwithstanding). But a lot of them won't, and there's a lot of money to be lost in the sport of bandwagon jumping.

Thoughts, as always, over on the Fool's Eye View message board please.