Tuesday 13 March 2001

Pic of the day: "Yes, I put all my gold in the stock market, why do you ask?" (Screenshot from Daggerfall.)

Stock market fools

We interrupt the ongoing navel-gazing to report from the world's leading stock exchanges, where the bears have gone crazy and are slaughtering the stock. Over the last year, Nasdaq has lost 60% of its supposed value. From a high of about 5000, it is now below 2000 and still falling.

Hallelujah, recession is here! It's not a dream anymore! Hallelujah, it's finally here, I've been waiting and waiting and waiting ... (Apologies to Chris de Burgh for mangling his song "Temptation of Brother John", incidentally the song that got me hooked on deBurgh in the first place. But I'm digressing as usual.)

Actually, recession is still a quarter away. It is a pretty sure thing, though. The stockmarket is like the stargazers derided by the prophet: Each month they foretell new disasters. The stock exchange is a meeting place of economists and capitalists; the economist see what way things are going, but they don't dare tell the whole truth to the capitalists who pay them. Sooner or later, though, the truth leaks out.

***

The truth, as I have repeatedly told you, is that shares have been horribly overpriced for years now. The glorious economy (stupid) of the last Clinton years was built on lies. What a surprise. I've explained this before, but this time perhaps it will stick: Shares are nothing but a part of a company. They are literally shares, that is, parts. If the company turns a loss, then you share in the loss. If they turn a profit, you share in the profit. How much simpler can it get?

Only a fool, then, would buy a part in something not profitable. As the ancient proverb says: "A fool and his gold are easily parted." This is what has happened during the last few years. People have saved money for their old age, and put this into worthless or worse than worthless projects. This they have done because they are fools. They need not necessarily have low intelligence, though it certainly helps. The primary criterium is ignorance, and a firm resolve to stay ignorant even in the face of facts.

A leader among otherwise admirable christians once said, while I listened, that a way to recognize the truth was that it made you happy. I do not think this attitude is limited to christians. People of all creeds and nationalities tend to believe that which makes them happy, no matter its scientific accuracy. This may work well enough for spiritual matters, for all I know. But when it comes to investment, it is truly worthless.

The infamous dot.companies have been surfing on the happy wave, ignoring the bleak and forbidding realm of economic reality. Now I hear that amazon.com expects to turn a profit this year, perhaps, unless they go bankrupt first. You know what? I could grow bananas on Greenland and turn a healthy profit - if I were allowed to sink billions and billions into the project first. Of course, the profit would be minimal compared to the investment, and would turn to loss soon after. But I could show a profit, if that was needed to make the fools throw new billions at me.

***

Now, as The Economist repeatedly says, stock markets are as likely to undershoot the target as overshoot it. If the bear market turns into a full scale panic, there will be some choice pickings for the people who kept their money elsewhere. For even though the first wave of dotcoms may have failed, the Internet is not going to go away. And e-trade is not going to go away. On the contrary, use of the Internet is going to explode: Not despite the recession, but because of it.

As Norwegian customers have embraced Internet banking, several companies have come together to standardize electronic invoicing. The new e-invoice will work for both companies and private customers, and the total processing costs are expected to be 10% of a paper invoice. Even if this had been ridiculously overstated, and the cost had been 90%, it would still be a massive cost cut. In the upcoming recession, companies cannot afford to use paper when electronic transactions are much cheaper. And private customers cannot afford to use old fashioned banks when a Net bank lets them do the work themselves and save the costs of labor, paper, and plush office buildings in the pricey part of town.

Internet will continue to increase productivity and introduce brand new services in the future. But that does not mean the profit will be in the Internet companies as such. For several decades, electricity fuelled a revolution in productivity, both in factory and office, as well as in the homes. If all this profit had ended in the pocket of the electricity companies, they would rule the world by now. But of course it did not. Neither did the railroads. Or the printing presses. And the same will happen this time.

The new economy has barely begun; but it won't consist of a few tech companies earning billions. It will consist of continued growth for the millions of everyday enterprises throughout the world, and the introduction of new services to meet human needs in new ways, probably mostly in entertainment and communication. For instance, virtual reality has not really taken off yet. There is a large untapped market in virtual reality chat rooms and similar safe arenas. It is a good bet that the Internet will continue its steady growth, until it is as common as the telephone and TV are today. In fact, I believe that telephone, TV, and newspapers will merge with the Net the way lambs merge with a wolf (to translate Tron Øgrim). But it will take perhaps half a century of gradual progress.

Which is why shares are not a "get rich quick" scheme, but a long term investment. If you were fooled into buying on top of the bubble, it will probably take some years before the shares grow back. If you bought into something of no value, you may yet lose it all. But if you spread your risk throughout the stock market, it will eventually grow back. You just have to wait. And learn to be less gullible in the future.