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The problem I have with this is that there's a lot of conflating what "should be" with what is – he talks a lot about "intelligent investors" and "good investor

The problem I have with this is that there's a lot of conflating what "should be" with what is – he talks a lot about "intelligent investors" and "good investors" – but that says nothing about what is (or isn't) actually happening. It's precisely when bad investments get made quickly, at irrationally exuberant levels that we get bubbles – and the claim is that there is exactly that sort of irrational exuberance going on with many startups/or in VC funding in the tech sector. The only thing that the author offers to refute that specific claim are his own assessments of valuations, but no hard numbers. Further, he tries to argue that the Instagram purchase is justifiable because it's only 1% of FB's value – but that's just it – that sort of thinking is begging the question (in the old sense of the term) or circular. Based on what I've read, a 100 Billion valuation of FB would put its P/E ratio at around 100 – that's high. Really high. So, what if it trades closer to a 20 P/E ratio (where many other tech companies are) – that means the Instagram purchase was nearly 5% of FB's worth – for a 13 person startup with no revenue – made only as a defensive play, according to some. To me, that's excessive. Details aside, the whole point is that you can't use numbers from within the suspected bubble to support the argument that other numbers are rational and thus reflect the lack of a bubble. Those sorts of short-sighted arguments are on my list of warning signs for a bubble. When we get enough of those, the idea of convergent evidences should lead objective observers to bet on it being a bubble...

j_baker 15y ago
Really? I would argue that a bubble is a psychological bug that causes investors to ignore the numbers. They're usually right there in front of you, but the bubble effect short-circuits the rational thought process that tells you not to invest without checking the data. Now, I will be willing to grant that perhaps we're about to be in a bubble, but now we're venturing into the land of speculation, aren't we? If gathering data to tell us what the markets are going to do were easy, bubbles wouldn't ever begin in the first place, would they?
- incongruity 15y ago
  How, exactly, do you see me as arguing that anything but numeric foolishness is going on here? Investors, in bubbles, frequently find ways to justify the numbers – often with talk of how the old rules don't apply, etc., etc. In this specific post's case, however, the author fails to see the lack of quality in the numbers which he (barely) uses. Trusting bad numbers without really digging into them is little different than "ignoring the numbers", as you put it. They're two sides of the same coin – sloppiness because of excitement or other failed thinking. As for your last argument – I'm not sure what to make of it. On the one hand, just a few lines above you argue that the numbers are usually "right in front" of investors and that bubbles are caused by ignoring them... but then you argue exactly counter to that and say that seeing bubbles isn't easy and that data can't tell you when there's a bubble. I strongly disagree with that last point – the housing bubble was definitely spotted using data before it burst, as was the last tech bubble. It's just that few wanted to believe that the old fundamentals still applied. But thus far, they always seem to.
- eli_gottlieb 15y ago
  When people are willing to grant that perhaps we're about to be in a bubble, we're in a bubble right now.
alain94040 15y ago
100 Billion valuation of FB would put its P/E ratio at around 100 – that's high Here's how I think about Facebook's valuation: I compare to Google. Facebook is the only player that can challenge Google's supremacy. Today, in terms of time spent, they are equal to Google. So at a minimum, they should be worth a quarter of Google's value. Maybe half. Probably not quite as much as Google yet, but close. Guess what. Google is at $200B. So valuing Facebook at $100B looks very reasonable to me. I'd say that at $50B, it would be a steal.
- incongruity 15y ago
  So, you explicitly ignore the P/E ratio in your assessment? Because, if not, here's a graph of Google's P/E ratio (currently 18.64): http://bit.ly/Jk8VAj http://bit.ly/Jk8VAj – compared to FB's projected P/E ration which is predicted to be over 5 times as much.
Retric 15y ago
Facebook bought Instagram with about 1/3 cash and 2/3 stock they also had 50 million cash on hand which inflated the purchase price. Honestly, they probably wanted a premium to cover the risk that FB's is worth less than 100 billion. But, they still got enough cash to make the founders comfortably rich, and the valuation is high enough that the VC's made a killing on paper which keeps them happy.

j_baker 15y ago

Really? I would argue that a bubble is a psychological bug that causes investors to ignore the numbers. They're usually right there in front of you, but the bubble effect short-circuits the rational thought process that tells you not to invest without checking the data. Now, I will be willing to grant that perhaps we're about to be in a bubble, but now we're venturing into the land of speculation, aren't we? If gathering data to tell us what the markets are going to do were easy, bubbles wouldn't ever begin in the first place, would they?

incongruity 15y ago
How, exactly, do you see me as arguing that anything but numeric foolishness is going on here? Investors, in bubbles, frequently find ways to justify the numbers – often with talk of how the old rules don't apply, etc., etc. In this specific post's case, however, the author fails to see the lack of quality in the numbers which he (barely) uses. Trusting bad numbers without really digging into them is little different than "ignoring the numbers", as you put it. They're two sides of the same coin – sloppiness because of excitement or other failed thinking. As for your last argument – I'm not sure what to make of it. On the one hand, just a few lines above you argue that the numbers are usually "right in front" of investors and that bubbles are caused by ignoring them... but then you argue exactly counter to that and say that seeing bubbles isn't easy and that data can't tell you when there's a bubble. I strongly disagree with that last point – the housing bubble was definitely spotted using data before it burst, as was the last tech bubble. It's just that few wanted to believe that the old fundamentals still applied. But thus far, they always seem to.
eli_gottlieb 15y ago
When people are willing to grant that perhaps we're about to be in a bubble, we're in a bubble right now.

alain94040 15y ago

100 Billion valuation of FB would put its P/E ratio at around 100 – that's high Here's how I think about Facebook's valuation: I compare to Google. Facebook is the only player that can challenge Google's supremacy. Today, in terms of time spent, they are equal to Google. So at a minimum, they should be worth a quarter of Google's value. Maybe half. Probably not quite as much as Google yet, but close. Guess what. Google is at $200B. So valuing Facebook at $100B looks very reasonable to me. I'd say that at $50B, it would be a steal.

incongruity 15y ago
So, you explicitly ignore the P/E ratio in your assessment? Because, if not, here's a graph of Google's P/E ratio (currently 18.64): http://bit.ly/Jk8VAj http://bit.ly/Jk8VAj – compared to FB's projected P/E ration which is predicted to be over 5 times as much.

Retric 15y ago

Facebook bought Instagram with about 1/3 cash and 2/3 stock they also had 50 million cash on hand which inflated the purchase price. Honestly, they probably wanted a premium to cover the risk that FB's is worth less than 100 billion. But, they still got enough cash to make the founders comfortably rich, and the valuation is high enough that the VC's made a killing on paper which keeps them happy.