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The article doesn't seem to address the question of if there is a tech bubble. How does assigning an acronym for the top companies indicates a bubble? Yes, 7 ou

by dabei 9y ago

The article doesn't seem to address the question of if there is a tech bubble. How does assigning an acronym for the top companies indicates a bubble? Yes, 7 out of top ten valuable companies are tech companies, but they are dominant players of large and highly profitable markets. Am I delusional?

redwood 9y ago
When regular people, who normally talk to you about recent movies, are telling you how much money they made on XYZ stock recently, that tends to be a sign that the market is starting to get inundated by novice investors who are essentially fueling an irrational rise. This is of course purely anecdotal but I do believe once the mainstream media latches onto a story and you start hearing the regular folks investing their money into that particular story there is a problem.
- tpeo 9y ago
  I think I've read somewhere that once newspapers report some piece of financial news, it's no longer news. Anyway, it seems like sound advice.
  - edgyswingset 9y ago
    Not that I'm inclined to believe stuff either way, but this is an op-ed and not really financial stuff being reported on.
- vostok 9y ago
  Are you saying that the novices are the cause of overly high valuations? If so I'm rather skeptical because these novices control very small amounts of money even in aggregate. If you're saying that the novices are just bad investors who always buy at the wrong time then I'd want a little more evidence of that. My base assumption is that the novices do not have predictive power and are simply "noise traders". Note that I'm not expressing a view on the market in this comment.
  - mcappleton 9y ago
    The point is that when novice investors finally know about it and get in, all the good investors have already been in for a while. At that point, there is no one left to buy. If there is no one left to buy, the stock quits going up. Of course then people will start selling, the smart ones first.
    - WalterBright 9y ago
      The stock price is always at an equilibrium between buyers and sellers, i.e. the number of each is the same.
      - mcappleton 9y ago
        If it was always at equilibrium, price would always be the same. A crash occurs when there are no buyers. To generate demand people offer their shares at very low prices. Then hopefully someone will buy. But if no one does, the offer their shares at even lower prices, and that's how the tumble works.
  - cbanek 9y ago
    The big investing fad now is all about indexing. That's what everyone recommends, including Warren Buffet. This means that with less than $1000, you can own a representation of the S&P500, weighted by market cap, either through ETFs or mutual funds. Weighted by market cap means that you're putting a larger percentage of that $1000 into the bigger companies, versus the smaller companies. When a few companies start to dominate the market, everyone can be overweight a few stocks in the same way, and not even know it. https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-up-a-huge-share-of-the-sp-500.html https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-...
    - vostok 9y ago
      One of the ideas of cap weighting is that it has minimal impact. If company A is worth 10x what company B is worth then I can buy 10x of company A and 1x of company B to spread my impact as evenly as possible.
- shardinator 9y ago
  I think you know there's a bubble when people tell you about the stock picks (amateurs and professionals), and when you quiz them about why the bought, they give you irrational arguments i.e. things unrelated to future cash flow. The reasoning for buying current tech companies may be forward looking or optimistic, but it's not irrational.
- Balgair 9y ago
  When the barber is getting into the oil-field, it is time to get out -Roughneck's Proverb
idlewords 9y ago
https://www.juicero.com https://www.juicero.com
adventured 9y ago
The bubble part is endlessly debatable, as it's strictly a subjective concept. The rather dramatic multiple expansion the last few years is not debatable however, it's at historically high levels. Microsoft's net income has not increased since 2011/2012 or so. The stock went up nearly 200% bottom to top over five years regardless of that. It's up roughly 67% over just two years, for absolutely no good reason that relates to actual growth in their sales or earnings. Plus, they've loaded up massively with debt in that time as well, their balance sheet keeps getting worse by the year. So who are the suicidal investors paying ~30 times earnings for zero net income growth for half a decade and an epic pile of debt? How about for Amazon's ~300 times 2017 earnings? It'll take them a minimum of ten years of 20% annual growth, to justify their present valuation, assuming they can ever manage to produce ~$20 billion in net income even with that amount of continued sales growth. There are far more mundane examples of the extreme valuation expansion that is going on (thanks Federal Reserve for another asset party!). ADP has hardly expanded its net income since 2011. The stock is up over 100% in that time, for absolutely no good reason. They have no growth of consequence, and there isn't likely to be any inbound. Quite the opposite if anything, they're probably on the chopping block of having their business seriously threatened by cloud competitors over the coming decade. Priceline.com has a tremendous business, with modest 10-15% annual sales growth... trading at ~45 times earnings, meanwhile their net income hasn't increased in years. The stock is up ~67% in 14 months or so, for absolutely no good reason, their growth didn't just suddenly shoot through the roof and it isn't about to. Why is PayPal's modest 14-15% net income growth worth 50 times earnings? A little over a year ago it was worth barely over half that. Dramatically increased future growth expectations? Yeah right. The examples don't stop, it's practically every publicly traded stock. Who's paying 30 times earnings for Coke (KO)?!? Its business is collapsing: 2014: $46b sales | 2015: $44.2b sales | 2016: $41.8b sales Net income for KO has gone from $9 billion in 2012, to $6.5 billion today, with a persistent annual erosion. Why is the stock at an all-time high? McDonald's is similar, their business has contracted by 10%+ since 2012, with net income down 13% over that time - the stock is up 50% in two years for absolutely no good reason. The damage on the way down will be immense, again.
- ecesena 9y ago
  Your data speaks about the companies but not about dollars invested in the stock market. If more people invest more (compared to the growth of companies/stocks) the value increases.

by dabei 9y ago

redwood 9y ago

When regular people, who normally talk to you about recent movies, are telling you how much money they made on XYZ stock recently, that tends to be a sign that the market is starting to get inundated by novice investors who are essentially fueling an irrational rise. This is of course purely anecdotal but I do believe once the mainstream media latches onto a story and you start hearing the regular folks investing their money into that particular story there is a problem.

tpeo 9y ago
I think I've read somewhere that once newspapers report some piece of financial news, it's no longer news. Anyway, it seems like sound advice.
- edgyswingset 9y ago
  Not that I'm inclined to believe stuff either way, but this is an op-ed and not really financial stuff being reported on.
vostok 9y ago
Are you saying that the novices are the cause of overly high valuations? If so I'm rather skeptical because these novices control very small amounts of money even in aggregate. If you're saying that the novices are just bad investors who always buy at the wrong time then I'd want a little more evidence of that. My base assumption is that the novices do not have predictive power and are simply "noise traders". Note that I'm not expressing a view on the market in this comment.
- mcappleton 9y ago
  The point is that when novice investors finally know about it and get in, all the good investors have already been in for a while. At that point, there is no one left to buy. If there is no one left to buy, the stock quits going up. Of course then people will start selling, the smart ones first.
  - WalterBright 9y ago
    The stock price is always at an equilibrium between buyers and sellers, i.e. the number of each is the same.
    - mcappleton 9y ago
      If it was always at equilibrium, price would always be the same. A crash occurs when there are no buyers. To generate demand people offer their shares at very low prices. Then hopefully someone will buy. But if no one does, the offer their shares at even lower prices, and that's how the tumble works.
- cbanek 9y ago
  The big investing fad now is all about indexing. That's what everyone recommends, including Warren Buffet. This means that with less than $1000, you can own a representation of the S&P500, weighted by market cap, either through ETFs or mutual funds. Weighted by market cap means that you're putting a larger percentage of that $1000 into the bigger companies, versus the smaller companies. When a few companies start to dominate the market, everyone can be overweight a few stocks in the same way, and not even know it. https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-up-a-huge-share-of-the-sp-500.html https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-...
  - vostok 9y ago
    One of the ideas of cap weighting is that it has minimal impact. If company A is worth 10x what company B is worth then I can buy 10x of company A and 1x of company B to spread my impact as evenly as possible.
shardinator 9y ago
I think you know there's a bubble when people tell you about the stock picks (amateurs and professionals), and when you quiz them about why the bought, they give you irrational arguments i.e. things unrelated to future cash flow. The reasoning for buying current tech companies may be forward looking or optimistic, but it's not irrational.
Balgair 9y ago
When the barber is getting into the oil-field, it is time to get out -Roughneck's Proverb

idlewords 9y ago

https://www.juicero.com https://www.juicero.com

adventured 9y ago

The bubble part is endlessly debatable, as it's strictly a subjective concept. The rather dramatic multiple expansion the last few years is not debatable however, it's at historically high levels. Microsoft's net income has not increased since 2011/2012 or so. The stock went up nearly 200% bottom to top over five years regardless of that. It's up roughly 67% over just two years, for absolutely no good reason that relates to actual growth in their sales or earnings. Plus, they've loaded up massively with debt in that time as well, their balance sheet keeps getting worse by the year. So who are the suicidal investors paying ~30 times earnings for zero net income growth for half a decade and an epic pile of debt? How about for Amazon's ~300 times 2017 earnings? It'll take them a minimum of ten years of 20% annual growth, to justify their present valuation, assuming they can ever manage to produce ~$20 billion in net income even with that amount of continued sales growth. There are far more mundane examples of the extreme valuation expansion that is going on (thanks Federal Reserve for another asset party!). ADP has hardly expanded its net income since 2011. The stock is up over 100% in that time, for absolutely no good reason. They have no growth of consequence, and there isn't likely to be any inbound. Quite the opposite if anything, they're probably on the chopping block of having their business seriously threatened by cloud competitors over the coming decade. Priceline.com has a tremendous business, with modest 10-15% annual sales growth... trading at ~45 times earnings, meanwhile their net income hasn't increased in years. The stock is up ~67% in 14 months or so, for absolutely no good reason, their growth didn't just suddenly shoot through the roof and it isn't about to. Why is PayPal's modest 14-15% net income growth worth 50 times earnings? A little over a year ago it was worth barely over half that. Dramatically increased future growth expectations? Yeah right. The examples don't stop, it's practically every publicly traded stock. Who's paying 30 times earnings for Coke (KO)?!? Its business is collapsing: 2014: $46b sales | 2015: $44.2b sales | 2016: $41.8b sales Net income for KO has gone from $9 billion in 2012, to $6.5 billion today, with a persistent annual erosion. Why is the stock at an all-time high? McDonald's is similar, their business has contracted by 10%+ since 2012, with net income down 13% over that time - the stock is up 50% in two years for absolutely no good reason. The damage on the way down will be immense, again.

ecesena 9y ago
Your data speaks about the companies but not about dollars invested in the stock market. If more people invest more (compared to the growth of companies/stocks) the value increases.