Here's The Evidence That The Tech Sector Is In A Massive Bubble
businessinsider.com
businessinsider.com
In 1999 and early 2000 every investing show on TV would constantly be talking about the new highs that Microsoft, Cisco, Nortel hit or the latest up and comers and the massive amounts of money being poured into it all. It wasn't the normal speal, it was like watching a cheer leading squad cheer on the the never ending boom. I don't know quite how to describe it, it was kind of eerie and surreal. And it wasn't just the investing shows that were doing it, it was being talked about all over the place, even outlets that would not normally talk about anything money or stock related.
The current situation does not seem much like that to me. Sure there are several cases of companies with sky high valuations and questionable future revenue but it's not industry wide like 1999.
This does not prove or disprove anything, of course. But it does make “This time it’s different!” an insufficient proof of something not being a bubble.
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Is d4vlx mistaken? If so tell us how.
My comment does not show that it is a bubble, nor was I trying to do so. The most that could be claimed is that I was trying to show that the possibility that it is a bubble still exists.
"This time is different" is normally referring to "tech is changing the world, we don't need he profits, it will grow forever, this time it's different" or "they don't make any more land, housing prices will grow forever, this time it's different". It's not at all the same things to point out that the scale of the bubble is much smaller. Lumping the two together produces a strong impression that your comment is disingenuous.
1) I don't see it effecting the tech industry as a whole to the level it did then.
2) It's not leaking out of the tech industry into the media, other industries, the financial world or popular perception to the same extent.
3) The amount of money flowing into tech and especially startups is significantly less now (proportionally).
4) There are many established business models that use the internet now while in 1999 there was much more speculation and few proven models.
I'm not denying it mind, but I too was there in the 90s. It was a crazy time. You would get in a taxi and the driver would be talking about stocks, giving out tips, talking about his portfolio. It was everywhere. Nowadays not so much. And outside Silly Valley, allowing for inflation tech wages have been basically flat since '01. A few years later it was the housing bubble, and everybody, everywhere was talking about property, buying, selling, renovating, letting. Now, if you put your ear to the ground, it doesn't sound like before.
But then as now, money is too cheap and money cannot stand still, it has to go somewhere, then a bit later it just evaporates. So it's bubble, but a different kind of bubble.
At any rate, there's a lot of, shall we say, underperforming froth in the tech startup world at the moment. Stuff that doesn't appear to have a direct connection of value to what's being offered. Whether it constitutes a broad marker of the tech market being in a systemic bubble is debatable, but certainly some of the ridiculousness of a bubble is visible if you watch the news float by.
It's my opinion that we don't have a broad bubble in tech. The stock market is probably getting close to a bear market. That's true enough, we've had a long bull run. But it might (I bet it's more likely) be the case that there's a "Startup" + VC/angel market inflation.
The thing is, anyone can draw a sawtooth over these kinds of things. The catch is, how wide is the sawtooth? Why would the market crash _now_ and not in for example, 2 years, or 5, or 10? You can't predict that with simple technical analysis, you need actual indicators.
What are the indicators they suggest? Anecdotal evidence that some companies have some investments in businesses that don't seem like they're worth it.
So what if AH stopped investing in early stage B2C startups? Perhaps they've just looked at their portfolio and determined their risk to be saturated? And what does the valuation of B2C have to do with the overall valuation of the tech industry?
Why is no one showing the numbers, how much money is in B2C tech startups right now? How much is in B2B tech? How much revenue are these sectors generating? How can we be expected to make a judgement over if we're in a bubble or not if instead of useful numbers they give us a bunch of anecdotes?
Articles like these are FUD, I don't know what the motivation is.
Please note that I'm not saying we're not in a bubble. I'm just saying this article is not helping us deciding if we're in one.
> Interest rates are basically at zero and have been for some time. When borrowers are paying close to zero interest on loans, that makes money cheap to get.
> People with money generally have a choice: save it in interest-paying, risk-free bank accounts or invest it in riskier assets that may pay more money over time. When interest is at zero, virtually any other kind of investment is likely to pay more because the risk-free alternative is so lousy. So investment asset bubbles get created. Stocks tend to go up.
QE3 consists of a series of very short-term loans (initially they were 1-day loans) that keep being redeemed and reissued, with the promise that the money injected into the system in this way will be taken out in the medium term. (This death sentence on the QE3 money is the reason why the money injected into the economy has not had the inflationary impact predicted by gold bugs).
Such very short-term loans are very valuable for financial institutions: they can finance short-term speculative investments and can be used as a partial basis to create longer-term financing. However, they do not provide the kind of investment Business Insider claims. For this kind of investment, you need financing over a period of years. 10-year treasuries, which provide a basline for the cost of longer-term financing, are relatively cheap, at 3.4% interest, but they are most certainly not interest free.
Every venture capitalist understands this, I am sure. A competent journalist who covers business financing will understand this too.
There is something similar to a bubble that plagues the sector and its those B2C companies that insistently build themselves to capture users and get their value from selling out to the big boys without ever making a decent profit.
1. Settle your debts soon. Losing your job does not mean losing your debts.
2. If you have no debts, save your money with low-risk investments (or a bank account, but then you are probably losing to inflation). If you lose your job you will still need to have some money available.
Just look for some bond funds which have had reasonable performance through the last few bubbles if you don't want to invest directly into bonds. You can also do a bond ladder, but some people advise against them.
EDIT: changed "usually" to "often" when describing the value of a bond
2. Your risk profile determines the ratio of stocks to bonds that you want to invest in. Stocks are higher risk, but they've historically given much higher returns than bonds. One bit of classic investment advice is "put {your age}% in bonds, everything else in stocks."
3. Buy index funds or ETFs. For longer term, ETFs are a better deal, and while supposedly less "convenient," it really isn't hard to open an account with an online broker and buy ETFs. You have a lot of options here, but the S&P500 is the standard. You could put some percentage into emerging markets, small-caps, etc. The nice thing about ETF's, or index funds for that matter, is that they're partially diversified by nature, so unless you really try you're not going to get a portfolio that's highly susceptible to one particular type of risk. Remember that every time you trade you're probably paying a brokerage fee, though--if you pay an $8 fee on a $1000 investment, that's almost 1% gone--a few months of expected returns!
4. Repeat as you save money.
5. Ignore all market advice, news that "X is a bubble," "Y is about to crash," "Z is about to take off," etc. People who are consistently right about this sort of thing are making billions in the stock market, not writing blog posts or newspaper columns. And even if they are working on Wall St, it's difficult to tell the difference between luck and acumen. If returns were purely random, with nothing called "skill," we'd be statistically quite likely to see someone like Warren Buffett--who has beaten the market consistently--just like we're statistically quite likely to see someone win the lottery. Buy and hold, only sell to spend. That's the only strategy you follow!
6. Exception to 5: if you like to gamble. :) There's nothing wrong with having a "fun" investment or two, as long as you know that they're a consumption good and don't really count on keeping them.
In any event, carefully monitor your expenses vs. ROI. Know how much transaction fees are, how much the fund takes, etc. In my reading, I found mutual funds to have many costs; this is why I went ETF.
(disclosure: I own only ETFs at this point)
Keep building your skill base and stay the course. It takes weeks (for people with marketing acumen) to make the next hot thing but years to build a technical skill base. The latter has less risk, so that's what you should do. If your career and job conflict, invest in your career, because your job can end at any time. (This advice applies always, not just in late-bubble times.) Divide your time (if you can) between high-level/front-end and low-level/back-end work. The former's good because it makes it easier to get to demos quickly, and communicate ideas in a slick, technological way; the latter, however, is a lot more stable. C and linear algebra and Lisp (the idea) don't change as much over 5 years as web tools.
There is a bubble but it's not nearly as bad as the one in the late '90s, and I don't think it's going to wipe out the whole software industry-- it'll just slow down some parts of it.
* Extended friends and family, none of whom worked in tech, were all considering investing in tech stocks.
* For that matter: everyone I knew was investing in equities.
* Largely profitless Internet brands bought up most of the Superbowl ad inventory
* Startups were funded whose business models were dominated by inventory and logistics costs
* Startup marketing (not just promotion, but all of marketing) was focused on epic launch events
* Companies with no profits routinely had public offerings
* Seemingly hopeless capital-intensive ideas (like 1 hour free delivery of candy bars) were kept afloat for years by investment dollars
* Most American consumers had limited access to the network, and nobody had ubiquitous mobile access
* You could close your eyes and fall backwards into an A-round (for instance: we managed to do it), which was the de facto standard first financing vehicle for startups
* The major investment banks not only fought over tech IPOs, but housed famous talking heads who spoke on TV and wrote op-eds cheerleading specific tech startups
* To get a web app launched, you bought several Sun servers and a 3-4RU Cisco router, each of which cost mid-5-figures. Oracle was your database.
* Cisco would "sell" you routers in exchange for company equity, and book the sale as revenue
* Totally reasonable for a startup to write its whole deployment stack, including application logic, in C
* Virtually all software development was done waterfall-style, frequently with an MBA calling the shots
* Just-formed startups had 5+ person "marketing" teams and 2-3 person "bizdev" teams
* $100k+ logos, $75k/yr to PR/branding firms
* Startups promoted themselves with print ads in magazines. That was a normal thing to do.
This is just a random list; I'm sure others here have better points. Writing it, I'm struck by how much worse startups and startup business practices were while generating so much more interest from the broader market than they do now.
I have a hard time believing that anyone who thinks we're in another dot-com bubble was actually working during the dot-com bubble.
The article itself is almost offensively bad. The fed funds rate was over 5% during the dot-com bubble. Stocks are doing well now, but so is everything else, and the notable tech stocks helping drive the market are drowning in cash that they're generating directly from consumers. "We're due for a downturn"? What does that even mean? Buy puts? Salaries are high? Maybe we're having an easier time paying engineers now that we're not using that money to buy TV ads or pay MBAs to "monetize eyeballs with brand equity". The rest of the article seems to be a critique of how big companies are choosing to spend their money --- but whether or not you think Yahoo should buy Tumblr or Twitter should be giving VP/Engs 10MM in stock, companies making decisions with their own money isn't what characterizes a stock bubble.
Obviously, what this article is really trying to do is to make a prose slideshow with links to other Business Insider articles, because its author had nothing better to write today. Jose, you're not dumb. You can find better articles than this. Unless this submission was sarcastic, in which case, well played.
Wouldn't that describe the whole flash sale industry and hence its recent decline?
Although I don't think that any 1 point makes a bubble, it is interesting how some of them are recurring now.
My point though isn't simply that things sucked, but that people should do some mental multiplication when they compare 1999 startups to 2013 startups; it's like comparing the Spruce Goose to a modern military UAV.
Speaking of genius, that leads me neatly onto: are things really cheaper? I am thinking of this story, even in '99 I'd have balked at $20k/mo in hosting charges alone http://www.theregister.co.uk/2013/02/15/heroku_marketing_mis...
I think this was in response to our story of a near-miss when a (7 ft, 23 inch rack) router dropped off the shipping dock, nearly crushing someone. Employees were no longer allowed to move routers after that incident- it became the shipping company's problem.
The phrase "tech bubble", used today, is really a misnomer. Extraordinary action taken by central banks around the world in recent years has created multiple asset bubbles. Most of them are, directly and indirectly, interconnected and many are feeding off of each other. You seem to have some recognition of this when you write, "Stocks are doing well now, but so is everything else...", but it doesn't appear that you care to ask the question, "Why is everything doing so well?"
If you work or invest in technology, it's understandable that you would have a primary focus on the sector. But when evaluating the notion of a "bubble", not looking at what is taking place from 30,000 feet is like looking at a fly on an elephant's behind.
But the quote at the end from the New Yorker article omits the next part where Draper himself does -not- believe there's a dip or crash coming -- although the author thinks Draper's evidence points there, Draper does not, he thinks we're at the part of his graph where the next thing is a boom, not a crash.
The very next sentence:
> I asked him what he thought the next dip would look like, and he frowned. The coast was socked in, and the Ritz golf course seemed kind of scraggly. “Well, first we need a boom,” he said.
My gut feeling is to agree with the OP, but the OP is a bit sloppy with it's evidence.
Do you know why Pinterest is worth a crap ton of money? Because they own women online. Just like Facebook owned twentysomethings online. When you control how a demographic shares information, it is trivially easy to generate revenue. Before you even both getting distracted by revenue, you focus on how far you can build out your base before you make money off of it.
I've been saying we're not in a bubble for the past 5 years, and we still arn't. If I've had a 7 digit exit for a machine learning company and I can't just walk into a VC firm and raise money for my next thing, then we arn't in a bubble.
It is tho'. QE -> inflation -> erosion of life savings. The difference is, this time these guys don't get a choice.
[1] http://www.bbc.co.uk/news/business-24716146 [2] http://www.theguardian.com/uk/2011/dec/20/rail-fares-rise [3] http://www.dailymail.co.uk/news/article-2463143/The-cost-liv...
Deliberately linked to both the Graun and the Mail there so no political bias.
It's inflation defined as the expansion of the monetary base that the OP is talking about.
Now, the bubble doesn't have to burst. Assuming companies like EMC, IBM, and the hundreds of smaller companies with data analysis offerings can come up with increasingly efficient and offerings that increase revenue per user/data-point. The best that most user/data-centric start-ups can currently get (without loads of capital) is affiliate commissions or "data-driven" ads (from Google, et al). This is rapidly changing, and if it can keep pace with the demands, there's no reason the current bubble can't turn into a profit center.
Another thing worth noting is that, while user/data-centric start-up valuations are (very much) on the high end, other, unrelated software and hardware/IaaS companies are thriving in sectors that aim at replacing human workers in various fields (ecommerce, marketing, accounting, medical [you name it], etc.) with machines. This is intrinsically valuable and cannot be described as a bubble any more than replacing manual gas pumps/attendants with automatic ones can. It's just the fruition of efficient ideas, coupled with readily available technology at prices that the SMB market can afford.
TL;DR
The bubble in user/data-centric start-up valuation doesn't reflect the rest of the technology sector, and user/data-centric start-ups are quickly learning how to turn the aforementioned into a profit.
Something is missing in that sentence. The most "valuable publicly traded tech company"? Or is it another definition of valuable? or of company? At around 400bn it's less valuable than Saudi Aramco (with a value around $2 - $5 trillion USD, PetroChina (1Tn) or Pemex (also about 400bn!).
http://blogs.mccombs.utexas.edu/titman/2010/03/01/more-thoug... http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aA1jw... http://www.ft.com/cms/s/2/5de6ef96-8b95-11db-a61f-0000779e23...
The main difference today is that most rational investors understand the diversity of software firms. The business model and drivers of a company like Facebook differ wildly from a company like Workday. But back in the 90s, they both would have been lumped in together as "tech stocks".
The only common ground between tech firms today is that they often compete for the same talent and investment. But that seems to be changing slowly as the industry matures.
i don't follow. what happens when we pair a and b with this fact?
This article in particular starts off with some relatively good data, but the rest of it is just anecdotal hogwash. Particularly the wage issue.
And amen to that. I can't believe the quote above was meant to be a snarky comment instead of a blunt dose of realism.
Past performance is not indicative of future results.
Will the demand for stock continue to grow? Perhaps if there are more tax cuts or if more money is "freed" so it can be put in stocks.