Managing Money For You and Your Family
It's Human Nature
James B. Bell, CFA
I recently re-read “The Fortune Tellers”, a book written in 2000 by Washington Post reporter Howard Kurtz. It is an insider’s look at how the technology boom of the late 1990s played in the stock market and in the media. Since the book was written during that era, it offers no benefit of hindsight as it discusses companies and business models that sometimes are laughable in retrospect. I vividly remember the intense interest and often outlandish justifications that were offered for these companies that could reshape the economy and our lives. Analysts and commentators had serious discussions about ‘monetizing eyeballs’, meaning attracting web users to a site at all costs to build an audience, then generating revenue through advertising or subscriptions.
The mentality was growth before profits. Technology valuations were extraordinarily high, with some stocks trading at 300 times earnings or more, not to mention the companies that were not profitable and were in come cases ‘pre-revenue’. Huge interest in the next hot technology offering produced IPOs that doubled and tripled on the first day of trading. I used to wonder if it was upsetting to a corporate treasurer all the funding the company left on the table as the underwriters priced the IPO so far below anticipated demand. I suppose if they owned a lot of stock personally perhaps they didn’t mind, and huge IPO gains were sometimes viewed as brand-building PR exercises.
I will admit that some of the survivors of that era have become world class, highly profitable companies. But for each of those there were hundreds of what now look like half-baked ideas that investors drove up to ridiculous valuations. Anyone visited DrKoop.com or pets.com lately? Both of those were publicly traded and at one point worth hundreds of millions of dollars. Remember K-Tel, the company that ran television infomercials for music collections like “Super Hits”? The company’s stock went from $3 to $34 in one month in 1998 on the news that they would be offering those products for sale over the internet.
The book also covers the media’s fascination and involvement in the tech bubble. Existing outlets such as newspapers, cable news, and CNBC amped up the coverage while new competitors sprung up both on and off line. The media didn’t cause the mania, but there is no doubt that so many reporters trying to fill up a news day magnified it. And since the media is a business, it was clear that doubters and pessimists did not bring the ratings like hypers and cheerleaders.
So that was a decade ago; what’s the relevance to today’s market? Reading the book in the current economic context, I could not help but notice the similarities to the recent commodity and real estate cycles. It was as if you just replaced a few words it could have been about the past few years. ‘Mortgage-backed securities’ for ‘venture capital’, ‘real estate developer’ for ‘web programmer’, maybe ‘HGTV’ for ‘CNNfn.” I was reminded of the quote, “history may not repeat but it does rhyme.” There were so many of the same themes: valuations skyrocketing, increasingly strained justifications to support those prices, and an ‘if we build it they will come’ mentality.
The long history of such booms and busts suggest they are a product of our human nature. Academics often teach that markets are coldly rational in nature, but experience suggests otherwise. A new field of study, termed behavioral finance, has evolved to analyze how our sometimes emotional brains understand and process events in the economy and financial markets. It is hoped that a better understanding of our instinctive responses and herd mentality could lead to better decisions in the future. At the very least, in the middle of the next boom-bust cycle we might be able say, “I’ve read this book before.”
If you have any questions you can reach me directly at 888-442-7637.
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