Tech Bubble? What Tech Bubble? 109
HughPickens.com writes: Conor Dougherty writes in the NYT that the tech industry's venture capitalists — the financiers who bet on companies when they are little more than an idea — are going out of their way to avoid the one word that could describe what is happening around them: Bubble. "I guess it is a scary word because in some sense no one wants it to stop," says Tomasz Tunguz. "And so if you utter it, do you pop it?" In 2000, tech stocks crashed, venture capital dried up and many young companies were vaporized. Today, people see shades of 2000 in the enormous valuations assigned to private companies like Uber, with a valuation of $41 billion, and Slack, the corporate messaging service that is about a year old and valued at $2.8 billion in its latest funding round. A few years ago private companies worth more than $1 billion were rare enough that venture capitalists called them "unicorns." Today, there are 107 unicorns and while nobody doubts that many of tech's unicorns are indeed real businesses, valuations are inflating, leading some people to worry that investment decisions are being guided by something venture capitalists call FOMO — the fear of missing out.
With interest rates at historic lows, excess capital causes investment bubbles. The result is too much money chasing too few great deals. Unfortunately, overcapitalizing startups with easy money results in superfluous spending and dangerously high burn rates and investors are happy to admit that this torrid pace of investment has started to worry them. "Do I think companies are overvalued as a whole? No," says Sam Altman, president of Y Combinator. "Do I think too much money can kill good companies? Yes. And that is an important difference."
With interest rates at historic lows, excess capital causes investment bubbles. The result is too much money chasing too few great deals. Unfortunately, overcapitalizing startups with easy money results in superfluous spending and dangerously high burn rates and investors are happy to admit that this torrid pace of investment has started to worry them. "Do I think companies are overvalued as a whole? No," says Sam Altman, president of Y Combinator. "Do I think too much money can kill good companies? Yes. And that is an important difference."
Who cares if it kills companies? (Score:5, Interesting)
What ticks me off is not that bubbles kill companies, but that bubbles kill retirement plans because of all the greedy "analysts" betting on a "sure thing."
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And there is nobody in the world who could be affected except /. users, right?
Re:Who cares if it kills companies? (Score:4, Insightful)
Too bad that doesn't stop a common mistake, though - someone betting everything on the company they work for, salary, stock/options, and 401(k) investments.
There is no level of diversification or foresight that can protect the masses from major bubble collapses. Sure some people will get lucky, and they will spend the next 20 years pretending it was their expert planning that explains this luck, but the vast majority will have their investments take a significant hit. You can put your money in index funds to avoid excessive fees, but have the stock market tank. You can put your money into buying rental properties, only to have your local real estate market tank. You can put your money into bonds, only to have their value erode as interest rates and inflation rise. You can put your money into precious metals only to have that bubble burst too.
Most people don't have enough money to diversify any better than just putting their money in diversified mutual funds. But then they lose almost all of the control you seem to expect them to have over their investments.
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You discuss many of the tactics people have to use to safeguard their money because investors cannot be trusted to not create ridiculous bubbles. I agree with almost everthing you wrote, but this entire thread was started by someone complaining that these tactics are even necessary. If it were not for these extreme bubble/bust cycles then people could probably keep much more of their money in higher return index funds instead of balancing them with bond funds.
Because of these extreme cycles, retirees have t
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I agree with almost everthing you wrote
Then why did you write, "There is no level of diversification or foresight that can protect the masses from major bubble collapses"?
I outlined a level of diversification and foresight that *would* protect the masses from major bubble collapses, and demonstrably *has* protected many people from major bubble collapses. You claim it's impossible. Only one of us can be right - either there *is* or there *is not* a way to insulate yourself.
I agree with your strategies for mitigating the risk of bubbles. I disagree that following these strategies has no negative effect on regular investor portfolios. As I said in my post, "while it is possible to mitigate some of the damage, standard investors lose out on a lot of income because of these strategies." If drastic bubbles were not part of a more moderate boom / bust cycle, regular investors with lower risk tolerance could make much more money investing.
That there is some "theoretically possible way to have invested and gotten more money out of the market" ignores the fact that human beings are irrational, jerky, panicked things who do stupid, reckless shit all the time - including investing in ways that create bubbles. Trying to pretend that's not the case, or trying to blame that all on "the investment industry" is stupid.
No one is claiming it is possible to have ma
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Eliminating risks come at a cost.
If this is true (which I agree it is) then anyone introducing extra risks into the system (without an equal amount of upside) is creating a negative effect for everyone else. This is basically my entire point.
The upside is that people who routinely make bad decisions in the stock market lose their money to people who don't. There is a net transfer of wealth to the more competent.
Volatility is simply not that big a deal.
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There is no level of diversification or foresight that can protect the masses from major bubble collapses.
Sure there is. It's so easy, you probably can't see it. Just stay away from individual companies, even individual industries, invest broadly across the market as a whole and ignore collapses - just ride them out. If you invest in some SP500 or "all stocks" fund, or whatever, you've own the same micro-% of the American economy before, during, and after the crash, and through the recovery. The exchange rate between USD and "micro-% of all sticks" may fluctuate wildly for a while, but just don't sell in a
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There is no level of diversification or foresight that can protect the masses from major bubble collapses.
Sure there is. It's so easy, you probably can't see it.
The closer you get to retirement, to more you'll need some share of your investments in quality bonds, so that if you need money to live on through a crash bottom you won't need to sell stock.
While these techniques help mitigate the damage from bubble collapses, they also limit your returns. This is why there is no way the masses can protect themselves from these collapses. The best thing they can do is forgo significant earnings because they have to be more timid in the 10-15 years leading up to retirement. If they didn't have to fear massive bubble collapses, your average investor could likely earn an extra 30% on their retirement accounts.
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The best thing they can do is forgo significant earnings because they have to be more timid in the 10-15 years leading up to retirement. If they didn't have to fear massive bubble collapses, your average investor could likely earn an extra 30% on their retirement accounts.
OK, but that's been true for 400 years, and isn't actually a barrier to retirement. You've IMO correctly understood the rules of the game, and under those rules anyone can retire on his own wealth, needing only to invest enough of his after-tax pay every year. I've been living on half my after-tax pay for 15 years now, and in another 5 or so I'll have the option to retire (though continuing to work would certainly improve that standard of living). You don't need to be nearly so frugal as "half" if you ha
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Rule 3 is the hard part (psychologically), which is why so many individual investors screw it up. The key is to understan
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A bubble doesn't affect all stocks equally. So you can protect yourself by moving out of the "bubbliest" stocks -- at this point, those seem to be new Internet/anything social stocks. (Facebook, Linkedin, Twitter, Uber, if it gets there before the bubble begins, online marketplaces, online advertising -- though not google necessarily -- and so on.)
If it happens... (Score:4, Interesting)
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Well, there is: But that's called "stagnation" and dreaded as hell as well.
I guess that's why they prefer the bubble method cause those bursts and crashs every now and then allows for recoveris that at least resemble the "eternal growth" pipe dream.
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Unfortunately, most economists subscribe to fallacy of infinite growth. If limiting factors were understood, then a stable economy at its capacity (and healthy) would be more clearly differentiated from a stagnating economy (stable, but below capacity), and you would not have to suffer these collapses. Collapses are a sign of an unhealthy ecosystem, and the same is true of the economy. Until the economy is treated as a subcomponent of the ecosystems it depends on, unfortunately, this is not likely to stop.
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The economy MUST grow to keep itself alive, never mind make people wealthy. They way it's been built absolutely requires growth or there will be a total collapse. Not only does it need to grow, but it needs to grow exponentially.
This is problematic because on Earth, with FINITE resources, it cannot keep growing at it's current rate. We will eventually either consume all resources or destroy the fragile eco systems or both. When this will happen nobody really knows, there are way way way too many variables
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The problem isn't that ordinary people don't have access to capital. The problem is ordinary people are poor at managing money.
Uber not worth $41 billion ... (Score:5, Insightful)
There is no way Uber is worth $41 billion.
That's a ridiculous number trumped up by idiots in the stock market who have overvalued a tech company.
Unicorns indeed. Uber is a tech company with an app, they sure as hell don't have that as a sensible valuation based on revenues or assets.
So every company Uber is going to buy with a stock swap? The stock owners should sell off and run, because they're being bought with funny money -- like when AOL bought Time Warner.
Increasingly I think the stock market is full of drooling idiots who think they're playing the lottery -- because that's the only sensible explanation for these ridiculous valuations. And, yes, this is exactly like the .com era -- a complete lack of common sense about the valuation of things because people desperately want them to be huge.
Of course, the problem is by the time the bubble bursts it's only the little guys who were hoping to pick up some scraps still holding onto the stock, because all the wealthy people and institutions have gotten out and run because they know damned well it's overvalued.
Then it's just finding suckers to take the overvalued stock off your hands.
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It's valued at $41 billion because of the private investors it has.... who might be idiots ;-)
Do you mean the ones who loan Uber for free the means for Uber to collect their revenue .. you know .. the drivers?
Re: Uber not worth $41 billion ... (Score:1)
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That almost makes it sound good (for the US): when the bubble pops, America still has all the material goods it imported, while the securities the foreigners bought simply evaporate.
Re: Uber not worth $41 billion ... (Score:4, Informative)
Um, no, you are exactly wrong. Uber is valued at $41b because of public stock market traders. The private investors are willing to pay $x, where $x is less than the valuation after IPO minus the time cost of money. This is all driven by idiots investing in the public stock market. They are the engine car that pulls the train.
Re: Uber not worth $41 billion ... (Score:4, Insightful)
Agreed; IPO is the exit strategy for these private investors. It's how they cash out.
I feel like I should point out that facebook's price/earnings ratio is 80, which seems insane since their business model has matured and it's not clear how in the world they can squeeze out 4x the profits. In fact, it seems more like they are a house of cards that could easily fall over given a market disruption.
But, that's the IPO these investors have in mind when they're guiding the next facebook to a public offering.
I suspect zuckerberg knows his company is overvalued, and that's why he is willing to pay billions for companies that have no revenue model. He knows FB stock is "funny money."
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There is no way Uber is worth $41 billion.
That's a ridiculous number trumped up by idiots in the stock market who have overvalued a tech company.
Of course it isn't. Shit like the article in question is to dupe people with money to spare while the people who are knowledgeable are already pulling their money out. There was exactly the same type of shit-tier articles going on pre-dotcom crash. All you need to do is look at the investors, and you see many shifting their assets to things that aren't nearly as volatile.
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41 billion is enough to buy what, 4.1 million second hand cars? I'd guess that's >1 car per Uber customer.
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I can see how Uber is worth a lot of money. Maybe not $41 billion, but definitely a lot of money. It's called "mind share" and "reputation". I know a lot of people don't think those are important, but I think they are very important. Look at Coca Cola. They don't make anything that anybody else can't make. Some people think they are the "best" cola, but that 's only because it's what they're used to drinking. If they were raised on Pepsi or RC Cola, they would think that those are the best.
Uber has made
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If Uber's valuation were based on their reputation, it would be negative.
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Uber has made a name for itself as the alternative to the Taxi Monopoly. And the Taxi business is a huge market, especially if you look at it world wide.
I think this explains a lot. Yes the worldwide market is large, but the corrupt monoply problem seems to be an American one. In many countries there are no "medallion" limits. Anyone who passes the appropriate tests and checks can become a licensed cabbie. And in some countries, those not wishing to be licensed can be cabbies anyway, but they don't get the
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Look at Coca Cola. They don't make anything that anybody else can't make.
Nonsense. I hardly even drink cola any more, but Pepsi still tastes like ass and Coca-Cola still tastes better. It's a complete falsehood to suggest that anyone else can do what Coca-Cola can do, because a lot of people have spent a lot of money trying and they've all failed so far. Coca-Cola doesn't have a good name just because they've had it for a long time, Pepsi is an old brand too. Coca-Cola has a good name because they make a product that people want to buy, and have been doing that for a long time.
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Tastes are very subjective. I know people who think Pepsi tastes a lot better. I'd personally rather drink root beer, cream soda, or ginger ale given the option. Coke has a much bigger mind share than Pepsi. It had a 13 year lead on Pepsi. That's a huge gap to make up, Even if they have had over 100 years to do it. They really only started to catch on during the great depression by marketing themselves as a cheaper alternative. That may have gotten them a few more sales, but it isn't a good place to be
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Remember Groupon? (Score:1)
Fluff companies sold to idiots by con-artists. Groupon continues to turn in losses, down from $12 billion at IPO to $4 billion and likely worth nothing.
Uber relies on a commercial advantage of offering a taxi service without the regulatory limits of taxis, but that won't last as they crack down on it, an an obvious taxi service.
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Fluff companies sold to idiots by con-artists. Groupon continues to turn in losses, down from $12 billion at IPO to $4 billion and likely worth nothing.
Uber relies on a commercial advantage of offering a taxi service without the regulatory limits of taxis, but that won't last as they crack down on it, an an obvious taxi service.
Companies that make money hire fancy accountants to hide income cleverly, and keep their valuations trading in an income/profit range.
Companies that sell dreams hire fancy accountants to create income cleverly, and keep their investors hanging on with projected profits and world domination.
Re: Remember Groupon? (Score:3)
That is not very correct. Investors know what the company is doing on the accounting side, in all but very rare fraud cases. Companies like you're talking about are pretty clear on what drives their Non-GAAP measures and they make an effort to explain why the non-GAAP measures are the "right" ones. It's a joke in the investor community how divergent GAAP and non-GAAP rev and earnings become over time. They know. They just invest anyway because they "know" others will too.
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Groupon had a great idea. It could have turned into a viable business. If they didn't get so greedy that they turned the businesses they were trying to help against them. There's so many stories of businesses selling more coupons than they could handle, and losing a ton of money by having to honor the coupons. Most companies learn their lesson and only use Groupon once before they decide it's not a bad idea. Try as I might, I haven't been able to get Groupon to stop sending me emails. The only products
*bubble bubble* (Score:2)
TULIPS (Score:1)
Tech Replace Mines (Score:3)
Basically all that has happened is tech companies have replaced mining companies in pump and dump schemes because of course tech companies require much smaller capital investment.
So tech just like mines, the initial investors working in collusion with their financiers who get a cut, work to create an illusion of a massive pot of gold at the end of a deep capital hole in the ground, which they sell to others and often pension funds are the targets.
So why do investment analysts for pension funds make so many bad investments, quite simply they are paid to do so with the money deposited in off shore tax havens. So paying a hundred million in bribes works when you are selling a billion dollar cough cough investment when you only invested a couple of hundred million in it. To put the cheery on top for themselves, they also run up huge debts paying themselves grossly inflated salaries.
It is not the front people doing it, it is the financiers doing it all in the background lending them the money to do it, advising them how to do it, cashing in on it being done and the culprits earning the sales commission selling the rubbish investments whilst they pay purchasing commissions to corrupt pension fund managers.
Crack open those tax havens and wow, will a whole bunch of the rich and greedy end up in jail, as well as corrupt politicians. The pressure is mounting for justice and it will come.
Re: Tech Replace Mines (Score:2)
You didn't talk at all about record low interest rates for 7+ years, which I found interesting.
Re: Tech Replace Mines (Score:5, Insightful)
This is a direct effect of low interest rates. Companies are taking out loans for the buybacks
Why are they doing this? Because high stock prices disproportionally favor the top level executives. The get stock at a discount (stock options) and can game the tax code for lower taxes as well. It's a legal way to loot their companies.
Why are rates so low? Because the previous generation of corporate criminals wrecked the world economy with their greed. Low interest is the way that governments are trying to regrow their economies.
Now governments all over are giving free money to the same group of people (and even the same individuals) who caused the damage in the first place with these near zero interest rates. (For example, the US Federal fund rate for the big lenders is 0.25% [bankrate.com].)
Stock buybacks don't grow the economy. There is a direct relationship between the sky high stock market and the long delayed general recovery outside the stock market.
This effectively redistributes wealth upward. The rich get richer at the expense of everyone else.
It's also another bubble. Whenever rates do go up there will be another crash. And given recent history, it will end up turning into another way of stealing from the poor to give to the rich.
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Low interest is the way that governments are trying to regrow their economies.
Low interest is the way that central banks are trying to compensate for governments run by ideologues who continue to (pretend to) believe that 'austerity' and tax cuts will solve all economic problems. It amounts to trickle-down economics at its worst, but that's fine with the liars who got that ideology enacted into law in the first place - and are managing to keep it locked in through lies and obstructionism.
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Austerity doesn't work. Instead of giving money to incompetent self serving bankers, it would be far better to spend directly on productive economic projects: infrastructure, education, health care. In fact, significantly increased spending on unemployment payments would be better then stock buybacks for the general economy. People on unemployment spend the money immediately which generates immediate real economic demand, a driver of growth.
The reason I did not say this in my post was
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Name for me one country that has spend LESS money on any given year than any of the previous years.
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When the left talks about austerity, they are referring to increasing deficit spending a little more slowly than originally planned. YoY govt spending growth of +3% when the plan was 3.3% is austerity in their warped minds.
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Dude, come on. Note how you had to say "spend money on productive economic projects". Of course it would be beneficial to spend money on things that are productive. That is circular logic. The problem is that government has an extremely poor track record of doing this, because it requires central planning.
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I worked for a company like that.
It died when the CEO decided he'd rather run a lifestyle company (that was actually profitable) forever instead of exiting. All of a sudden, management convinced the
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Not sure why you're getting slammed by mods. This is truth. If big oil disappeared, you'd be up a creek. If big pharma went away, you might die. If the industrials went away, our infrastructure would rot.
If FaceBook disappeared? The world would actually be a better place. Tesla isn't perfect; I like electric cars but I hate some of the big brother that's coming along for the ride. Same deal though, we could live without them and somebody else will eventually pick up their patents and make electrics t
seems inevitable (Score:2)
it depends (Score:5, Interesting)
Consider that venture capitalists invest in the exit, not in you having a great time building a great idea into a great company with great people.
Then consider 1915-1965 had innovations like penicillin, the auto mobile, aircraft, the space race, and that 1965-2015 has had the IC and internet as really defining innovations then from that perspective the rate of innovations is on the decline.
All the new "inventions" I can think of that are available to the masses are all designed to improve something that already exists to get people to consume more efficiently. I think this is directly attributable to patent and copyright laws preventing long term economic growth that comes from innovating new things which is the longer term fall out from activities conducted by the music industry and patent trolls. IT is just the most obvious sufferer.
Until the X and Y generations (or N-generation for those born *after* the invention of the internet) start taking political power from the Baby Boomer's we are going to be stuck in 1950's thinking. And that's not to say some Baby Boomers aren't capable of 21st century thinking, it's just that there isn't enough of them to make a political difference.
I'm convinced that humanity is on the verge of some spectacular innovations, like long carbon nano-tubes, genetic and nano engineering. However all of these ideas pale in comparison to the idea that we can change something as simple as the laws that maintain the status quo.
So this cycle of bubble and burst will continue whilst the engines of innovation are suppressed. Who knows when it will burst or deflate - just be ready when it does.
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I'm convinced that humanity is on the verge of some spectacular innovations
If only the old people died? Am I right?
No, you're not right at all. It's certainly not the message I intend to convey at all. What I'm saying is that the sheer bulk of intrenched capital is the political inertia that has to be overcome.
You start off with 'the previous generation created great things' but then go off on some weirdo tangent that everything has stagnated. That is not true.
Well I'm open to you telling me what radical world changing innovations have occurred from 1965-2015.
You are just being bigoted.
I am not being bigoted. Did you read my comment in full? I said And that's not to say some Baby Boomers aren't capable of 21st century thinking, it's just that there isn't enough of them to make a political differe
Last time we saw crazy market valuations, (Score:2)
It was because wall street knew they would be bailed out, so. The banks are even bigger now than they were then. What will it take to get reform?
Re:Last time we saw crazy market valuations, (Score:5, Insightful)
What will it take to get reform?
Blood on the streets. Lots of it.
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What will it take to get reform?
Blood on the streets. Lots of it.
I don't see how police^W private security forces cracking down on protesters will lead to reform.
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If the voting majority in a first-world democracy actually wanted reform, they would get it in the next election. ...
In fact, that is the major advantage of democratic systems. We don't have to shoot -nearly- as many people, to have a revolution. And the infrastucture usually survives! 8-)
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Toil and trouble (Score:2)
Better not perform The Scottish Play [yahoo.com], then. Any other unmentionables I forgot to mention?
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Ooh... You're close, but in fact the cumulative inflation rate [usinflatio...ulator.com] for 2010 - 2015 was 8.5%, not 1000%.
Interest rates (Score:3)
Interest rates have been so low that nobody wants to invest in bonds or other interest-bearing funds. Where else are people with money going to invest? Once interest rates start coming up, the picture is going to change dramatically.
It doesn't seem as bad as it was in the late 90's, when investors were throwing money at anyone who could do something "on a computer." At least this time around, most of the companies with high valuations actually do something valuable, even if they don't yet know how to make money. Still, there are a lot of crazy stock prices out there.
Easy fix (Score:1)
Time for good old fashioned taxes
Vocabulary (Score:2)
This is highly informative! I couldn't sure until now, but the fact that they avoid using terms like 'bubble' that everyone can understand, and use Orwellian language, pretty much confirms that it's actually a bubble.
Tech stock inflation is very simple (Score:2)
Its like trying to buy a gift and you only have one shop open and you need something for a party in 10 minutes, so what ever you buy will suck.
There are a group of stock traders that have the problem that they have to spend $1,000,000,000 this week because another billion will come in next week and they told a bunch of suckers that they only invest in high gain, high risk stocks. There simply isn't anything left for them to buy that is a good buy so they pick some ramdon tech stocks and pour the money in.
bubble denial is sign of bubble (Score:2)