8 ms·

It's not 1999

62 points by clarkm 12y ago

carsongross 12y ago
No, it's not. The Swiss just auctioned 10 year debt at a negative yield. So, no, it's not 1999.
- a8da6b0c91d 12y ago
  Oh, man, does anyone else remember getting 5% interest on savings accounts? What a golden age.
  - VLM 12y ago
    This is insightful when you look at something like Facebook's financials. So $200B valuation on $12B of gross revenue but profit varies around zero and last quarter was 1/2B aka almost exactly 1% annualized rate of return. Better than my local credit union savings account, but riskier. Probably a reasonable valuation. Governments will collapse if interest rates ever return to normal, so they probably won't. But its interesting to see how cheap capital or "value" is when interest rates approach zero. If interest rates were 20% like 1980 and you needed 25% to get investors to even sniff, that would drop facebooks valuation from $200B to about $4B to maintain that 25% return. That's quite a haircut. Low interest rates result in a margin-like whip when revenues drop. Say revenue dropped a billion at FB. That would drop profit by half and if interest rates remain constant, risk constant etc, that would collapse the price by half. And thats a less than 10% decline in revenue. Ouch. So one effect of low interest rates is making valuation/price very sensitive to small revenue changes. This will make things exciting.
mbesto 12y ago
The only benefit that comes from bubble-talk articles is that publishers get eyeballs.
timr 12y ago
"For one, if everything goes sour, the folks taking a hit can very much afford it." Really. Where do people think this private capital is coming from? I guess the investment banks and fund managers who are dumping hundreds of millions into late-stage companies are doing that exclusively with the investments of wealthy people? The fact that people aren't investing in Uber via E-Trade accounts doesn't mean that it won't hurt regular folks when the bubble pops. When this all goes south, we're going to find out that grandma's pension was tied up in it, just like last time. It's just a bit better hidden in 2015.
- klenwell 12y ago
  We both zeroed in on this same point in this article. You could be right. Have we identified a new class of suckers (which I see as a necessary condition)? Anyone have any data to support or refute this hypothesis?
- seregine 12y ago
  Generally, limited partners like pension funds diversify their asset allocation. I found this interesting presentation that shows 57% of US pension funds is in the "equities" asset class, but I would expect most of that to be public blue-chip stocks, with a small fraction dedicated to higher-risk growth capital. http://conferences.pionline.com/assets/2014_GPAS_Study_Final.pdf http://conferences.pionline.com/assets/2014_GPAS_Study_Final... In another interesting note, this shows that pension funds in the US grew at over 6% annually between 2003-2013. The recent horror stories you're thinking of are less about pension funds, and more about grandma's savings being tied up in her own house.
  - bradleyjg 12y ago
    Pension funds, especially public pension funds, have been given unrealistic growth targets by employers that want to cheap out on contributions. The only way to even have a chance to hit those growth targets is by taking on risk. So pension manager can't just stick to AAA rated bonds and blue chip stocks. For example, CALPERS targets an overall 7.5% annualized rate of return in its investment portfolio.
klenwell 12y ago
I'm generally with the naysayers and the skeptics, but this point makes sense to me: This though, is why concern one — the lack of access for retail investors — is arguably a firewall against this truly being a bubble. This seemed to me one of the key necessary factors to the dotcom bubble and the housing bubble after it: online brokers allowed people who previously didn't have a lot of experience to buy stocks and even daytrade. (Count me in!) Similarly, ARMs and the various other exotic mortgage tools opened up the housing market to lots of people who traditionally wouldn't have had access. (Thankfully learned my lesson with the NASDAQ bubble.)
- maxxxxx 12y ago
  A lot of the money comes from sources like pension funds. A collapse won't hurt retail investors directly but their pensions will hurt. If Uber at $20 billion is such a great deal, why don't Larry Ellison, Bill Gates or Warren Buffet buy it outright?
  - adamlett 12y ago
    Nobody said it was 'a great deal'. It could be that it is simply priced right. In which case a savy investor might be able to find investments elsewhere. And don't forget that just because the three you mentioned didn't jump at the investement (maybe because only one of them is actually a professional investor), it doesn't mean that nobody else did. Obviously somebody did.
- a8da6b0c91d 12y ago
  The fracking boom was obviously a huge bubble. It has mostly burst in recent months. There was no direct involvement of retail investors.
- ghaff 12y ago
  There was also arguably much more connection between the tech industry as a whole and the dot-com bubble. When all the startups and web companies went down, they dragged companies like Cisco, Sun, and EMC--indeed just about everyone--down with them. (Admittedly those companies had profited handsomely by selling to all the free-spending dot-coms and had also over-invested in overhyped technologies as well.) But if all the snapchats and instagrams--heck, even Facebook--come crashing to earth, it's not clear to me there's a huge amount of collateral damage outside of the companies directly involved and their (mostly non-retail) investors. Not zero of course. But a lot less than post-2000.
johngalt 12y ago
If it isn't a bubble now, what criteria would make it a bubble? The opening paragraph creates an infallible criteria. It's true that many people thought instagram wasn't worth $1billion. Does that mean $35 billion is less indicative of a bubble, or more? Simply saying 'hah! Bubble predictions were wrong in 2012 because valuations are still rising, so they must be wrong now too.' This sort of thinking would never predict a bubble.
- spiritplumber 12y ago
  A lot of people who post on my facebook wall seem to think that it's the beginning of the Singularity. https://www.youtube.com/watch?v=IFe9wiDfb0E https://www.youtube.com/watch?v=IFe9wiDfb0E I hope they're wrong if it looks like this.
  - eli_gottlieb 12y ago
    Have you explained what poor suckers they are?
    - spiritplumber 12y ago
      No, why would I?
- kgwgk 12y ago
  Paraphrasing David Einhorn "thirty-five times a silly price is not thirty-five times as silly; it’s still just silly". It's hard to predict the turning point. Or maybe this time it's different...
deleted 12y ago
[deleted]
toby 12y ago
Do people remember 1999? 24% of people in the developed world and 5% worldwide had internet access. No one had mobile broadband (remember WAP?), and wired broadband was just starting. Virtually none of the public .com companies made a profit. However, the NASDAQ was basically where it is now. Many people I knew were getting multiple job offers with incentives like a Boxster S or a 4-day workweek thrown in. We may or may not be in a bubble now, but the excessiveness of that time really felt like a different level to me.
- nostrademons 12y ago
  Yeah, I remember thinking in 1999 that the Internet was going to be huge, but it wasn't going to be huge yet, and there would be a helluva reckoning for dot-com investors when the inflated expectations didn't pan out. With this bubble, I'm bearish not because I don't think that the general investment thesis of tech disrupting existing markets is wrong, but because I don't think these particular companies will be the ones left standing when the dust settles. Basically, I'm betting that technological progress will be more dramatic than we expect, and that these are early market leaders that will then fade away into obscurity as future technology changes the assumptions they're built upon. Uber and Lyft, for example, are dead as soon as self-driving cars become viable. DropBox is vulnerable to the end of the file; in recent devices, the filesystem is quite hidden and peoples' workflows just don't involve creating files, they involve inputting information in some specialized cloud service provider. AirBnB may end up being eaten by itself: as it becomes more viable economically, you'll see more purpose-built construction being built to be listed straight on AirBnB, and at some point it becomes worth it to ignore the consumer sellers entirely and just act as a broker between commercial property owners and travelers.
  - adamlett 12y ago
    It's not difficult to predict the future with 100% accuracy if you don't have to provide a deadline for your predictions. Every product or service will eventually become obsolete, but the question is when? Will Uber make enough money for its investors to make the investements worthwile, before its service becomes obsolete by self driving vehicles? Will DropBox find an alternative business model before the "end of file" occurs?
notahacker 12y ago
The article makes an interesting point about whether the later IPOs are leaving private capital bearing the risk rather than retail investors. It's basically correct about the beauty of SaaS, except for the obvious counter that high-margin businesses are a magnet for competition in the long run. But it starts off with it's very worst argument, the ultimate '99 argument even: analysts suggesting Instagram's value increased 35-fold since acquisition based on the assumption that if it "fully monetized" it could contribute $2bn revenue (ie. at zero costs and zero discount rate you're still looking at a 17 year time horizon to get $35bn from Instagram, which is about three lifetimes for youth-oriented media properties) It suggests that's quite reasonable with reference to the stock price of yet-to-turn-a-profit Twitter. It doesn't get any better when it suggests the "unicorns" are different because they're competing with non-tech-enabled businesses. That could have been a slide from the WebVan pitch deck. Plus it's very, very wrong in the case of AirBnB: Sabre et al sewed up a large chunk of the profitable end of the distribution market by solving the technical problems of filling hotel rooms, and locking themselves into the infrastructure, before the internet. AirBnB has a flair for consumer marketing, but does that really make it worth more? The argument that the '99 companies failed because the mass of consumers didn't exist and the infrastructure wasn't ready is true, but for any self-respecting bear that's an indication of exactly why it could be worse than 99 when investors get cynical about companies peaking at hundreds of millions of users whilst still being unable to squeeze a respectable profit to justify their valuation.
angersock 12y ago
The only frustrating part to be is that, since apparently the IPO rate is rubbish, my hopes as an early engineer of getting fuck-you money are now worse than they were in '99. So, all of us doing the hard and annoying work of building the companies are getting screwed.
dkrich 12y ago
The fact that Instagram is now valued at $35 billion suggests the 2012 doomsayers were just a bit off. Is that really a fact? Clicking through to that article and reading it (which I don't recommend) shows that that valuation is based on the whims of a group of analysts at Citigroup. From the article: “While Instagram is still early in monetizing its audience and data assets and its financial contribution to FB is minimal today, we believe that it is quickly gaining monetization traction and would contribute more than $2bn in high margin revenue at current user and engagement levels if fully monetized,” they wrote. It's a bit ironic that the initial premise of the article is that commentators on the Apple/Microsoft battle of the 80's had their facts wrong.
nosuchthing 12y ago
The whole "debt / insurance derivatives" issue was never fixed from 2008. Whether businesses making use of emerging technologies and the internet are worth one million vs twenty billion seems to pale in comparison in the realm of economic balance and bubbles. Visual chart for reference: http://xkcd.com/980/huge/ http://xkcd.com/980/huge/
niche 12y ago
Yes! Of course, those who blew the bubble 16 years ago learned their lesson and built a basket this time. A few items may fall out of the basket as the supermarket gets busy, which makes me think Uber will fall on the wrong side of legislation (and AirBnb will not) based purely on Peter Thiel's name comment in that recent interview. That being said, my gut tells me the opposite. Ideally, they both thrive!
dataker 12y ago
While there's enough arguments and data to claim we're not in a tech bubble, the amount of doubt/negativism/uncertainty is a strong display of market sentiment and I'd mainly use it as a leverage.
discodave 12y ago
The distinction made at the end of the article between a "valuation bubble" and a "risk bubble" seems entirely false to me. "much of the media has adopted Gurley as the apostle of the “here we go it’s 1999 all over again” mantra, but that was a valuation bubble. Companies simply weren’t worth what they were priced at. Gurley is arguing that the private market with its limited information and oversight is producing something very different: investors putting too much money in companies without enough information or enough potential upside to justify the risk." To me "investors putting too much money in companies without enough information or enough potential upside to justify the risk" == valuation bubble.
- rqebmm 12y ago
  Agreed. At the end of the day investors are doing the following formula: (Projected Revenue * %Risk of Ruin) = Valuation If you overestimate the projected revenues, or underestimate the risk , you're still arriving at the wrong valuation, and if investors are doing this systematically, we get a bubble.
- adamlett 12y ago
  As a poker player, I recognize that you can be ruined both by making plays with a negative expected value (= valuation) or by making plays with positive expected value but which you are not adequately bankrolled for (= risk). Doyle Brunson wrote in his tome Super System from the seventies that he would gladly bet his entire net worth on a 51% chance of success. Even though this is technically a bet with an expected positive outcome, its clearly very risky. Modern gamblers recognize this and pay attention borh to the expected value and the variance.
otakucode 12y ago
I'm no economist, but it seems to me that we're just experiencing society slowly learning how to deal with this new 'software' thing. Before the introduction of computers into the workplace, things were fundamentally different. Productivity inched up incrementally year after year, and we dealt with that very well. We understood it, and we structured things to function smoothly with it. Between 1950 and 1980, average worker productivity grew by 76% and the average compensation of the lower 90% of the economy rose by 75%. Then computers showed up. Instead of worker productivity inching up slowly, it started multiplying. Your secretary didn't go from being able to answer 25 letters a day to 27, she went from being able to answer 25 letters a day to 150. No one knew how to deal with this. Keeping worker compensation in line with the value being created would require annual raises to get much larger. Companies would need fewer workers every year to reach the same levels of productivity. Entirely new products and services became possible all at the same time. Companies needed thinkers, not laborers. So many things changed so fast. And societies and economies don't really 'do' fast. 1980 was yesterday as far as social change is concerned. Analysts are still looking at companies and industries through lenses shaped by the Industrial Revolution - and most companies are operating in the same old ways too. We haven't adapted to the computer age yet, and it will probably be a long time before we do. Until then, 'Are we crashing or soaring?' is probably going to be a constant topic of debate.
jonstokes 12y ago
I don't know whether we're in a repeat of 1999 or not, but I know that this article is not very convincing. "In short — and I’m not the first to say this — it’s less that valuations are unnaturally high than it is the fact that there is a completely new capital market — the growth market." No, you're not the first to say this. Down through the ages it is usually phrased as follows: "this time is different." I'm not yet convinced that we're in a bubble, but a few more articles like this and I will be. (And as others have pointed out, the attempt to draw a distinction between a "risk bubble" and a "valuation" bubble is hand-waving nonsense.)
- Zelphyr 12y ago
  > a few more articles like this and I will be Can you elaborate on why? "If it bleeds it leads" and the potential of another bursting bubble is making the media wet themselves. And when the media starts getting orgasmic about something its only natural that bloggers are want to follow. But them constantly writing about a bubble doesn't make it true any more than them constantly writing about Ebola wiping out civilization (at least that was the implication).
natrius 12y ago
Bubbles are macroeconomic phenomena. If you're discussing the likelihood of a bubble without addressing the unique macroeconomic situation the world is in—widespread quantitative easing to deal with a deleveraging crisis—you're probably missing something.
- smoorman1024 12y ago
  Yes. I would say watch what happens when the Fed definitively decides to raise rates. If there is no pullback in the big social companies then I'll be converted to the "This time is different" camp

It's not 1999

62 points by clarkm 12y ago

carsongross 12y ago

No, it's not. The Swiss just auctioned 10 year debt at a negative yield. So, no, it's not 1999.

a8da6b0c91d 12y ago
Oh, man, does anyone else remember getting 5% interest on savings accounts? What a golden age.
- VLM 12y ago
  This is insightful when you look at something like Facebook's financials. So $200B valuation on $12B of gross revenue but profit varies around zero and last quarter was 1/2B aka almost exactly 1% annualized rate of return. Better than my local credit union savings account, but riskier. Probably a reasonable valuation. Governments will collapse if interest rates ever return to normal, so they probably won't. But its interesting to see how cheap capital or "value" is when interest rates approach zero. If interest rates were 20% like 1980 and you needed 25% to get investors to even sniff, that would drop facebooks valuation from $200B to about $4B to maintain that 25% return. That's quite a haircut. Low interest rates result in a margin-like whip when revenues drop. Say revenue dropped a billion at FB. That would drop profit by half and if interest rates remain constant, risk constant etc, that would collapse the price by half. And thats a less than 10% decline in revenue. Ouch. So one effect of low interest rates is making valuation/price very sensitive to small revenue changes. This will make things exciting.

mbesto 12y ago

The only benefit that comes from bubble-talk articles is that publishers get eyeballs.

timr 12y ago

"For one, if everything goes sour, the folks taking a hit can very much afford it." Really. Where do people think this private capital is coming from? I guess the investment banks and fund managers who are dumping hundreds of millions into late-stage companies are doing that exclusively with the investments of wealthy people? The fact that people aren't investing in Uber via E-Trade accounts doesn't mean that it won't hurt regular folks when the bubble pops. When this all goes south, we're going to find out that grandma's pension was tied up in it, just like last time. It's just a bit better hidden in 2015.

klenwell 12y ago
We both zeroed in on this same point in this article. You could be right. Have we identified a new class of suckers (which I see as a necessary condition)? Anyone have any data to support or refute this hypothesis?
seregine 12y ago
Generally, limited partners like pension funds diversify their asset allocation. I found this interesting presentation that shows 57% of US pension funds is in the "equities" asset class, but I would expect most of that to be public blue-chip stocks, with a small fraction dedicated to higher-risk growth capital. http://conferences.pionline.com/assets/2014_GPAS_Study_Final.pdf http://conferences.pionline.com/assets/2014_GPAS_Study_Final... In another interesting note, this shows that pension funds in the US grew at over 6% annually between 2003-2013. The recent horror stories you're thinking of are less about pension funds, and more about grandma's savings being tied up in her own house.
- bradleyjg 12y ago
  Pension funds, especially public pension funds, have been given unrealistic growth targets by employers that want to cheap out on contributions. The only way to even have a chance to hit those growth targets is by taking on risk. So pension manager can't just stick to AAA rated bonds and blue chip stocks. For example, CALPERS targets an overall 7.5% annualized rate of return in its investment portfolio.

klenwell 12y ago

I'm generally with the naysayers and the skeptics, but this point makes sense to me: This though, is why concern one — the lack of access for retail investors — is arguably a firewall against this truly being a bubble. This seemed to me one of the key necessary factors to the dotcom bubble and the housing bubble after it: online brokers allowed people who previously didn't have a lot of experience to buy stocks and even daytrade. (Count me in!) Similarly, ARMs and the various other exotic mortgage tools opened up the housing market to lots of people who traditionally wouldn't have had access. (Thankfully learned my lesson with the NASDAQ bubble.)

maxxxxx 12y ago
A lot of the money comes from sources like pension funds. A collapse won't hurt retail investors directly but their pensions will hurt. If Uber at $20 billion is such a great deal, why don't Larry Ellison, Bill Gates or Warren Buffet buy it outright?
- adamlett 12y ago
  Nobody said it was 'a great deal'. It could be that it is simply priced right. In which case a savy investor might be able to find investments elsewhere. And don't forget that just because the three you mentioned didn't jump at the investement (maybe because only one of them is actually a professional investor), it doesn't mean that nobody else did. Obviously somebody did.
a8da6b0c91d 12y ago
The fracking boom was obviously a huge bubble. It has mostly burst in recent months. There was no direct involvement of retail investors.
ghaff 12y ago
There was also arguably much more connection between the tech industry as a whole and the dot-com bubble. When all the startups and web companies went down, they dragged companies like Cisco, Sun, and EMC--indeed just about everyone--down with them. (Admittedly those companies had profited handsomely by selling to all the free-spending dot-coms and had also over-invested in overhyped technologies as well.) But if all the snapchats and instagrams--heck, even Facebook--come crashing to earth, it's not clear to me there's a huge amount of collateral damage outside of the companies directly involved and their (mostly non-retail) investors. Not zero of course. But a lot less than post-2000.

johngalt 12y ago

If it isn't a bubble now, what criteria would make it a bubble? The opening paragraph creates an infallible criteria. It's true that many people thought instagram wasn't worth $1billion. Does that mean $35 billion is less indicative of a bubble, or more? Simply saying 'hah! Bubble predictions were wrong in 2012 because valuations are still rising, so they must be wrong now too.' This sort of thinking would never predict a bubble.

spiritplumber 12y ago
A lot of people who post on my facebook wall seem to think that it's the beginning of the Singularity. https://www.youtube.com/watch?v=IFe9wiDfb0E https://www.youtube.com/watch?v=IFe9wiDfb0E I hope they're wrong if it looks like this.
- eli_gottlieb 12y ago
  Have you explained what poor suckers they are?
  - spiritplumber 12y ago
    No, why would I?
kgwgk 12y ago
Paraphrasing David Einhorn "thirty-five times a silly price is not thirty-five times as silly; it’s still just silly". It's hard to predict the turning point. Or maybe this time it's different...

deleted 12y ago

[deleted]

toby 12y ago

Do people remember 1999? 24% of people in the developed world and 5% worldwide had internet access. No one had mobile broadband (remember WAP?), and wired broadband was just starting. Virtually none of the public .com companies made a profit. However, the NASDAQ was basically where it is now. Many people I knew were getting multiple job offers with incentives like a Boxster S or a 4-day workweek thrown in. We may or may not be in a bubble now, but the excessiveness of that time really felt like a different level to me.

nostrademons 12y ago
Yeah, I remember thinking in 1999 that the Internet was going to be huge, but it wasn't going to be huge yet, and there would be a helluva reckoning for dot-com investors when the inflated expectations didn't pan out. With this bubble, I'm bearish not because I don't think that the general investment thesis of tech disrupting existing markets is wrong, but because I don't think these particular companies will be the ones left standing when the dust settles. Basically, I'm betting that technological progress will be more dramatic than we expect, and that these are early market leaders that will then fade away into obscurity as future technology changes the assumptions they're built upon. Uber and Lyft, for example, are dead as soon as self-driving cars become viable. DropBox is vulnerable to the end of the file; in recent devices, the filesystem is quite hidden and peoples' workflows just don't involve creating files, they involve inputting information in some specialized cloud service provider. AirBnB may end up being eaten by itself: as it becomes more viable economically, you'll see more purpose-built construction being built to be listed straight on AirBnB, and at some point it becomes worth it to ignore the consumer sellers entirely and just act as a broker between commercial property owners and travelers.
- adamlett 12y ago
  It's not difficult to predict the future with 100% accuracy if you don't have to provide a deadline for your predictions. Every product or service will eventually become obsolete, but the question is when? Will Uber make enough money for its investors to make the investements worthwile, before its service becomes obsolete by self driving vehicles? Will DropBox find an alternative business model before the "end of file" occurs?

notahacker 12y ago

The article makes an interesting point about whether the later IPOs are leaving private capital bearing the risk rather than retail investors. It's basically correct about the beauty of SaaS, except for the obvious counter that high-margin businesses are a magnet for competition in the long run. But it starts off with it's very worst argument, the ultimate '99 argument even: analysts suggesting Instagram's value increased 35-fold since acquisition based on the assumption that if it "fully monetized" it could contribute $2bn revenue (ie. at zero costs and zero discount rate you're still looking at a 17 year time horizon to get $35bn from Instagram, which is about three lifetimes for youth-oriented media properties) It suggests that's quite reasonable with reference to the stock price of yet-to-turn-a-profit Twitter. It doesn't get any better when it suggests the "unicorns" are different because they're competing with non-tech-enabled businesses. That could have been a slide from the WebVan pitch deck. Plus it's very, very wrong in the case of AirBnB: Sabre et al sewed up a large chunk of the profitable end of the distribution market by solving the technical problems of filling hotel rooms, and locking themselves into the infrastructure, before the internet. AirBnB has a flair for consumer marketing, but does that really make it worth more? The argument that the '99 companies failed because the mass of consumers didn't exist and the infrastructure wasn't ready is true, but for any self-respecting bear that's an indication of exactly why it could be worse than 99 when investors get cynical about companies peaking at hundreds of millions of users whilst still being unable to squeeze a respectable profit to justify their valuation.

angersock 12y ago

The only frustrating part to be is that, since apparently the IPO rate is rubbish, my hopes as an early engineer of getting fuck-you money are now worse than they were in '99. So, all of us doing the hard and annoying work of building the companies are getting screwed.

dkrich 12y ago

The fact that Instagram is now valued at $35 billion suggests the 2012 doomsayers were just a bit off. Is that really a fact? Clicking through to that article and reading it (which I don't recommend) shows that that valuation is based on the whims of a group of analysts at Citigroup. From the article: “While Instagram is still early in monetizing its audience and data assets and its financial contribution to FB is minimal today, we believe that it is quickly gaining monetization traction and would contribute more than $2bn in high margin revenue at current user and engagement levels if fully monetized,” they wrote. It's a bit ironic that the initial premise of the article is that commentators on the Apple/Microsoft battle of the 80's had their facts wrong.

nosuchthing 12y ago

The whole "debt / insurance derivatives" issue was never fixed from 2008. Whether businesses making use of emerging technologies and the internet are worth one million vs twenty billion seems to pale in comparison in the realm of economic balance and bubbles. Visual chart for reference: http://xkcd.com/980/huge/ http://xkcd.com/980/huge/

niche 12y ago

Yes! Of course, those who blew the bubble 16 years ago learned their lesson and built a basket this time. A few items may fall out of the basket as the supermarket gets busy, which makes me think Uber will fall on the wrong side of legislation (and AirBnb will not) based purely on Peter Thiel's name comment in that recent interview. That being said, my gut tells me the opposite. Ideally, they both thrive!

dataker 12y ago

While there's enough arguments and data to claim we're not in a tech bubble, the amount of doubt/negativism/uncertainty is a strong display of market sentiment and I'd mainly use it as a leverage.

discodave 12y ago

The distinction made at the end of the article between a "valuation bubble" and a "risk bubble" seems entirely false to me. "much of the media has adopted Gurley as the apostle of the “here we go it’s 1999 all over again” mantra, but that was a valuation bubble. Companies simply weren’t worth what they were priced at. Gurley is arguing that the private market with its limited information and oversight is producing something very different: investors putting too much money in companies without enough information or enough potential upside to justify the risk." To me "investors putting too much money in companies without enough information or enough potential upside to justify the risk" == valuation bubble.

rqebmm 12y ago
Agreed. At the end of the day investors are doing the following formula: (Projected Revenue * %Risk of Ruin) = Valuation If you overestimate the projected revenues, or underestimate the risk , you're still arriving at the wrong valuation, and if investors are doing this systematically, we get a bubble.
adamlett 12y ago
As a poker player, I recognize that you can be ruined both by making plays with a negative expected value (= valuation) or by making plays with positive expected value but which you are not adequately bankrolled for (= risk). Doyle Brunson wrote in his tome Super System from the seventies that he would gladly bet his entire net worth on a 51% chance of success. Even though this is technically a bet with an expected positive outcome, its clearly very risky. Modern gamblers recognize this and pay attention borh to the expected value and the variance.

otakucode 12y ago

I'm no economist, but it seems to me that we're just experiencing society slowly learning how to deal with this new 'software' thing. Before the introduction of computers into the workplace, things were fundamentally different. Productivity inched up incrementally year after year, and we dealt with that very well. We understood it, and we structured things to function smoothly with it. Between 1950 and 1980, average worker productivity grew by 76% and the average compensation of the lower 90% of the economy rose by 75%. Then computers showed up. Instead of worker productivity inching up slowly, it started multiplying. Your secretary didn't go from being able to answer 25 letters a day to 27, she went from being able to answer 25 letters a day to 150. No one knew how to deal with this. Keeping worker compensation in line with the value being created would require annual raises to get much larger. Companies would need fewer workers every year to reach the same levels of productivity. Entirely new products and services became possible all at the same time. Companies needed thinkers, not laborers. So many things changed so fast. And societies and economies don't really 'do' fast. 1980 was yesterday as far as social change is concerned. Analysts are still looking at companies and industries through lenses shaped by the Industrial Revolution - and most companies are operating in the same old ways too. We haven't adapted to the computer age yet, and it will probably be a long time before we do. Until then, 'Are we crashing or soaring?' is probably going to be a constant topic of debate.

jonstokes 12y ago

I don't know whether we're in a repeat of 1999 or not, but I know that this article is not very convincing. "In short — and I’m not the first to say this — it’s less that valuations are unnaturally high than it is the fact that there is a completely new capital market — the growth market." No, you're not the first to say this. Down through the ages it is usually phrased as follows: "this time is different." I'm not yet convinced that we're in a bubble, but a few more articles like this and I will be. (And as others have pointed out, the attempt to draw a distinction between a "risk bubble" and a "valuation" bubble is hand-waving nonsense.)

Zelphyr 12y ago
> a few more articles like this and I will be Can you elaborate on why? "If it bleeds it leads" and the potential of another bursting bubble is making the media wet themselves. And when the media starts getting orgasmic about something its only natural that bloggers are want to follow. But them constantly writing about a bubble doesn't make it true any more than them constantly writing about Ebola wiping out civilization (at least that was the implication).

natrius 12y ago

Bubbles are macroeconomic phenomena. If you're discussing the likelihood of a bubble without addressing the unique macroeconomic situation the world is in—widespread quantitative easing to deal with a deleveraging crisis—you're probably missing something.

smoorman1024 12y ago
Yes. I would say watch what happens when the Fed definitively decides to raise rates. If there is no pullback in the big social companies then I'll be converted to the "This time is different" camp