Appetite for IPOs? We're not hungry
As long as there have been stock markets, there have been stock market bubbles.
In 18th-century Europe, the lure of riches in the new world launched stock prices on a roller coaster ride. In late 20th-century America, it was the new economy that sent investors over the top. Human nature being human nature, some time in the future a new thing will come along that touches off yet another speculative bubble.
But I'd be willing to bet 100 shares of Google that the catalyst won't be the Google initial public offering, despite all the heavy breathing the IPO announcement triggered last week. The reason is simple: It hasn't been long enough since the bursting of the last technology bubble. The wounds are still too raw; the memories are too fresh; the lessons are still too deeply seared into our brains.
What are those lessons? At least three come immediately to mind.
Stocks that go way up can come way down. Let's be honest: A lot of us had a hunch in 2000 that technology stocks were overvalued and might be due for a correction. But a 99 percent correction? Locally, the stock price of CMGI, an Internet darling, tumbled from $163 to 29 cents. It has since recovered to $1.85. EMC, a real company with real profits like Google, went from a high of $100 to a low of $3.83. It now sells for $11.41. In my own portfolio, Lucent skidded from $63 to 58 cents. In Texas they remember the Alamo. I remember Lucent. Don't think for a minute that these losses existed just on paper. The meltdown in the market forced people to postpone retirement and radically rethink how to pay for their kids' college education. I don't know about you, but my 401(k) balance is still well below its 2000 peak. It's not a 201(k) anymore. Maybe a 301(k).
Hot companies are not always what they appear to be. Enron was never as popular a business as Google, but for three years running it was voted the most admired energy company by Fortune magazine. Enron turned out to be a house of cards. Ditto for WorldCom, another dynamo that once wowed investors. Not everyone in corporate America is a crook; only a small number of great companies will be unmasked as frauds. Still, it is hard to shake the suspicion that terrific numbers may not really be so terrific. As John Kenneth Galbraith wrote in ''The Great Crash," a classic study of the 1929 bubble, ''When people are cautious, questioning, misanthropic, suspicious, or mean, they are immune to speculative enthusiasms."
Technology is a great business, but it is still a business. Technology companies are not immune to the business cycle. Nor are they immune to competitive pressures. When someone in technology gets a great idea -- say, an easy-to-use search engine -- there is very little to stop rivals from copying that idea. The better the idea, the more imitators will be attracted to the business. The Internet boom spawned hundreds of companies, but to date, only three qualify as major league successes: Amazon.com, Yahoo, and eBay. Google may be the fourth. But like the presidents at Mount Rushmore, the giants of the Internet are a pretty exclusive club. For every Abraham Lincoln there are plenty of Coolidges and Fillmores who won't measure up.
Over the past year, as technology stocks have rebounded, a few minibubbles have developed. Nanotechnology stocks skyrocketed on the assumption that an exciting new technology will translate into big profits. Chinese Internet stocks soared last year only to come back to earth this year. Some small biotechnology companies sell at ludicrously high prices on the remote chance they will find the cure to some horrible disease.
But a big-market bubble isn't in the cards. Galbraith argued that in the aftermath of a bubble bad memories immunize investors from another outbreak of speculation. But not forever. ''With time and the dimming of memory, the immunity wears off," he wrote. ''A recurrence becomes possible."
The bottom line: We're safe for today. But tomorrow? Who knows?
Charles Stein is a Globe columnist. He can be reached at stein@globe.com.
