Posted on 07/22/2002 5:52:44 AM PDT by dep
Anyone who has been surprised by the tanking of the stock market just hasn't been paying attention. The crash was inevitable; the only variable was when. As such, it shouldn't be a factor in trying to predict the future of publicly traded Linux companies.
Alan Greenspan described it as "irrational exuberance," or crazy happiness. We'd leave out the part about happiness -- the equities market spent the 1990s in near-total insanity. If the 1980s were the "me" decade, the 1990s were the decade of ignoring the obvious.
It was a decade in which there was actually a national debate over the meaning of the word "is." It was a decade in which investors, who had achieved success by following the adage "buy what you know," cast that sound advice aside and bet their futures on things that they did not know about, could not know about, because those things were not even a pig in a poke -- they were a poke that it was promised might oneday contain a pig or something.
Revisit the companies that led the dotcom boom: Many had no sense ever of making money, yet investors poured capital into them. In the Linux realm, Eazel was an example, burning through more than $20 million without it ever being clear where the profit would come from, before finally going bust. There are scores of similar stories from other computer-related companies.
Thiugh this in no way excuses it, there cannot be a surprise that the "brick and mortar" companies, so reviled in the dotcom days, might have wanted to get into the act as well. Existing companies got hammered as investment capital chased (and often became) puffs of smoke. It might have been easy for them to have thought that if playing fast and loose with the business plan were now allowed, taking a few accounting shortcuts had become permissible, too.
After all, it was now possible to get off the hook by disputing the meaning of a state-of-being verb.
Look at Red Hat. It's a decent enough company, but it is young and it faces a very powerful foe. When it went public in the $13 range in 1999, its shares were probably fairly priced. It quickly went through the roof in a dotcom-ish feeding frenzy, reaching $268 in December 1999. It closed Friday at $5.69 (though there has been an intervening 2:1 stock split, so the equivalent value is $11.38). This for a company that has never paid a dividend. The decline in its share price took place chiefly during the 2000 dotcom bust.
After having squandered their resources on the phantom companies of the 1990s, and unwilling to admit that it was chiefly their own foolishness that caused those resources to disappear, investors grew wary. The accounting irregularities, which are cause for concern but not for market collapse, led to what might be called "irrational anguish," or craziness in the other direction. It was Mark Twain who observed that it is important to learn the correct lesson from any experience -- that a cat which has jumped onto a hot stove won't do it again, but it won't jump onto a cold one, either. In this way, investors resemble cats.
The question worth asking is not why the market is declining but how it got so ridiculously overpriced to begin with. Based on what is actually a moderately robust economy that enjoys considerable productivity gains, the Dow Jones Industrial Average ought to be in the 7,500 to 7,800 range. The NASDAQ, which never had any business at 5,000, is probably just about where it should be.
Investors, meanwhile, now are following Gerald O'Hara's admonition that the only thing that lasts is land, and are driving real estate prices in many areas as high as they drove the dotcomms three or four years ago. At least, they seem to figure, land won't disappear.
The lesson? There are no miracles on Wall Street, so wishful thinking does not replace good research. With any luck, the lunacy of the 1990s will be gone with the current shakeout, after which the market can once again be a place where careful investors can do very well indeed. Those who look upon the market as a lottery are idiots, and should invest their money in lottery tickets, which are receipts proving payment of the state tax on idiocy.
But none of it has anything to do with whether or not Linux companies will achieve success or succumb in failure. Only their business plans, their management, how well they embrace reality, and the market they seek will determine that.
dep
LMAO! If that were really true there would not be the insistent wailing and gnashing of teeth over recent stock market action here at FreeRepublic.
This is the 1990's trading system. Originally designed by Goldman Sachs and adopted by most Wall Street players. Or, as insiders call it, the "Clinton/Gore Pumper & Dumper". It was taken off-line the day Bush was elected. Sorry folks. The party is over. The "C/G P & D" has been replaced by the old "fundementals" system.
Enough said.
I think he's right on the money with the Dow, but the NASDAQ is still way too expensive. It should be hovering in the 950 to 1050 range. The P/E's of those companies are way too high.
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