In Silicon Valley, Partying Like It’s 1999 Again
nytimes.com
nytimes.com
Some interesting analysis I read was take $10K during the period of 1995 - 2000, invest it in tech stocks, sell them when it hit $15K, and invest $10K again in stocks, sell when it hit $15K, rinse and repeat. When the bubble bursts you lose all of your $10K investment, but in the last bubble you had put aside $25K in 'profits.' The point of the analysis was that sticking to goals and running your investing based on those goals was more effective in a bubble than 'going long' (as I did btw) The other key was that you did not try to 'amplify' your risk by selling and then investing all of the money you had ($15K after the first round) because that left money at risk. The money you pulled out had to go somewhere that was really solid (like an FDIC insured savings account or CD).
Perhaps I'll get a chance to try that strategy this round.
This process is a 'rate capture' process, which is that a fixed amount of principle captures a moderately proportional fraction of the change in price. With a capture limit (in this case 50%)
I built a simple spreadsheet for you [1] which can illustrate this. In the spreadsheet there are two scenarios, one the person "pulls the trigger" every time their investments have grown by the target amount, pull off the growth and take it out of the game, and then go back in with their basic investment. In the second scenario they just let it grow and grow and grow. After 5 rounds with a growth target of 50% they have $35K if they regularly pull the trigger, and $75K if they let it ride (more money is in play so the same percentage increase in the market gets you more money back). When the bubble bursts, if you lose all of the money in play, you end up with $25K and $0.
You can play with the spreadsheet and make some other choices to see how they work out. The smaller your trigger point the closer you get to having identical returns because you're not getting any amplifying effect of the money allowed to grow, the larger the growth target the longer in time (generally) you have to wait before you can pull the trigger and like musical chairs find yourself losing out because you waited to long.
An interesting diversion is to run different investment strategies against the historical record from the bubble to see which left you with more money. If we are in another bubble that could be useful information.
Or not. See other posts on the randomness of it all.
[1] https://docs.google.com/spreadsheet/ccc?key=0Atwe7dq6iPQHdGx...
If you honestly think the current Silicon Valley looks anything like 1999, you don't understand what happened in 1999.
When you chew gum, you don't blow the exact same bubble every time, do you? Some are bigger, some are smaller. Some pop sooner, some last longer. Some make more of a mess when they pop, some make less of a mess when they pop.
I participated in the tail end of the first bubble, and while there are absolutely differences, some meaningful, I think it takes some effort to ignore the many meaningful similarities.
Let's get serious here. SnapChat refusing $3 billion, while ridiculous, does not at all compare to the masses of VC cash going to thousands of companies with no idea about how they were going to make money at all.
If you must compare them, compare them by scale. Today, we have a small handful of companies getting a lot of attention because of questionable financial dealings (whether it be IPO or the refusal of cash).
In the '90s, the differences were much larger (presumption that putting "Internet" in front of any business idea would automatically mean IPO and great riches), and the number of businesses involved was much larger.
That is why there is no bubble. When there is an actual bubble, I'll be more than happy to call it out.
Some are bigger, some are smaller.
To qualify as a "bubble," doesn't it have to involve a large segment of the industry, not just a handful of companies?
So long as money remains this cheap, the stock market will keep expanding until there's a necessary crash. Money is chasing risk, inflating assets accordingly.
The last few quarters have delivered the first indications, in my opinion, of a repeat of the excesses of the 1990s. The higher this stock market goes without fundamentals directly supporting it, the more frothy parts of the tech sector are likely to get.
Over 90% of the gains in the broad stock market the last two years have been from pure multiple expansion. Another year of this and it will be a full blown bubble across the board, and by that point what will Snapchat (or the next craze) be worth? $8 billion? $20 billion? The only thing left at that point will be a massive implosion on the other side.
Where are stocks like LinkedIn going from here? $50 billion (50 times sales)? Is Twitter worth $40 billion (70 times sales)? Is Tesla worth $30 billion? Is Netflix worth $35 billion? Is Amazon worth more than Walmart? Should Google have a 40 pe ratio, while growing earnings at 10-12%?
I say the party is nearly over, there's no upside left looking out several years that doesn't require a bubble.
We're not seeing this type of investor behavior at all right now (please correct me if I'm wrong). I personally am not really sure that FB and Twitter will ever find a way to make huge profits and become sustainable large businesses but looking at the market it's clear that investors share this uncertainty.
And since anecdote is so popular when discussing bubbles, I still don't see "normal" people talking about how they're going to "make it rich!". I had people in 2007 telling me I was missing huge opportunities to get rich in not purchasing a home, house flipping shows were all over tv. In the late 90s I knew HS students that were trading stocks on the school library's computers during lunch.
Don't get me wrong, especially when everyone I know in the non-tech sector is still struggling, I have anxieties that the party won't last. However looking around I see nowhere near the insanity I remember in 1999 and 2007.
[0.]http://www.investopedia.com/features/crashes/crashes8.asp
That's not at all clear to me, could you share your reasoning? There are many large SV companies with very high valuations and negative or very low profits in comparison. Companies like Twitter and FB look to me to have a lot of future profit baked into their current valuation - around 100 years worth in the case of FB, and infinite years in the case of Twitter or many other tech stars like snapchat - that's not very realistic and is pretty frothy. Ordinary people are taking a leap of faith and investing in these companies without solid profits to back it up. I'm not persuaded we're in a very rational market right now, given the doldrums the US economy is experiencing, which is a sharp contrast to the new stock market highs we have recently seen.
In between all this, this talk of bubble busting literally freaks me out. When God forbid it happens, it will leave deeper scars than the 2000 one with many a stable careers coming to a sudden halt, and along with them their families.
That's definitely something that people usually don't take into account when they have a great job currently or pursue a "great" career.
Something in demand today that gets you in a great lifestyle will also put you in a super specific niche that, with all you qualifications, you can only do a very narrowly defined job. That may only exist in one place (the place you are currently working).
Otoh, if you are in, say, less glamorous job "sales" and you lose your sales position you can always find a job making money and selling something else. Not that there aren't super specialized sales jobs (say jet engines at GE) that would be hard to duplicate but you could probably land another high paying industrial equipment sales position.
Even if there is a downturn in outsourcing, so be it. Same happened in the US after the last bubble. Tons of folks who were drawn to the industry for pay, and have little depth in their skillset, flamed out and went back to careers they were better suited for. Those with more depth formed the basis of the current industry: soft business skills, multiple languages, those who loved the craft and learned on their own time.
Across the board, the money is moving laterally from one offline component of some infrastructure to it's online-only equivalent. It's happening now, and it's happening fast.
The hype is real.
Regardless, I've noticed the same thing on YouTube, they really need to fix that. Why are you running an add for car insurance on a video obviously geared towards children? I mean, why are you advertising at all on videos clearly geared towards children.
Are you saying toys, video games, and movie trailers for children should not be advertised to children? To who then, to their parents?
I don't completely disagree but try this statement on for size:
"Well, people don't use classified ads any longer, but those classified ad dollars still exist."
Actually they don't. Some of those dollars have gone to other intermediaries like eBay but most of them just aren't in the ad ecosystem any longer. Money does indeed move to new platforms but there's no rule that says it has to move on a 1:1 basis and, in the case of advertising, the evidence so far suggests that a lot of the spend just goes away.
Big advertising budget won't go to internet simply because TV isn't attractive anymore.
I worked at a couple different start-ups in the 90's, and a lot of the trouble we faced was the result of our core audience either not having internet access or not being willing to enter their credit card information online.
Quote - "Almost everything is moving on-line."
Year - 1999
Author - Jay Conrad Levinson
Book name - Mastering Guerrilla Marketing: 100 Profit-producing Insights You Can Take to the Bank
Page # of quote - page 186
Publisher - Houghton Mifflin Harcourt
Google Books working(?) link - http://books.google.com/books?id=8f69VffjDJMC&lpg=PA186&dq=%...
I heard the same thing the last time around. Before the 2000 crash. Before the 2008 crash. It's different though this time, right?
Time to sell!
The cream of that crop graduates to writing buggy and crashy IOS and Android apps.
The very elite (ya know the ones that passed calculus and linear algebra) of that esteemed crowd sits through a few Coursera and/or Udacity courses and proclaim themselves data scientists.
All of this has happened before and will happen again.
PS Absolutely loving what this is doing to total compensation though.
there's a whole cottage industry around this, see: starterleague.com
basic html+css with some passing familiarity with Rails/Jquery and some common libraries = 80K, $100/hour programmer bro.
not too far off from '99...
Bootcampers lack the mathematical rigor of fresh CS grads, but most of the value in web products doesn't come from writing proofs or optimizing algorithms. And if bootcampers are creating value, I don't see why they shouldn't be compensated appropriately. The market seems to agree, since these people are getting hired.
Not to take away from most of the rest of your statement, but remembering 1999, I'd like to point out that the market is dumb as a bag of hammers. The only thing it excels in is short-term profit maximization.
Nothing wrong with that, if that's your goal. But if you plan on a business that lasts a bit longer, you might want to ignore "the market" in determining if people add value.
It's not as many as you think. I'd guess it's measured in hundreds? Possibly low-thousands? And not everybody in these courses is a beginner, and they're not all trying land a software engineering job. Of the 3 people I personally know who've enrolled at App Academy et al, 1 is an experienced BE developer who wanted an accelerated immersion class in app development, 1 is a product manager who wants to pick up more programming skills to make him a better startup founder, and one legitimately was a beginner who wanted to land a software engineering job. So far, a couple months after successful completion, she hasn't had any offers yet.
This one has some numbers without dollar signs (and of course some with): http://gigaom.com/2013/10/18/how-has-vc-funding-changed-sinc...
So there likely won't be a VC bust like before, we need to start using a different metric, unless all we are concerned about is the health of VC.
1000 smaller investors loosing their small investments has the same effect as 1 VC loosing their large investment, doesn't it?
Think about the housing crisis, that was a bubble where hundreds of thousands of people over-financed by a small amount, and then couldn't pay back the creditors.
People go back and forth about global warming. . errrr. . climate change. Does it exist, doesn't it? My view is even if it doesn't exist, shouldn't we act like it is, just in case, so that if it really does exist, we can say we already mitigated the damage?
You should really act the same way with these bubble stories. Is there a bubble? Maybe there is, maybe there isn't. Either way, shouldn't you just plan like there's a bubble to protect yourself?
Snapchat is a great example. Although I can understand Snapchat's co-founder's altruistic view of life, in these time, you gotta take the money and get out while you can. If there is indeed a bubble, those billions will evaporate in a few minutes, never to come back again. At just think what other really cool stuff you could build several BILLION dollars. . . .
Is it a bit frothy? Yes, but the correction that is coming will not be nearly as severe. Those bulked up startups will crash if cut off from future funding.
But a larger majority will just hunker down and bootstrap their way through it. That wasn't an option for most in 1999.
It's a funny account of some 2005 hazy "Open Media" event, written by a photojournalist called Jim Lowne and titled "Party like it's 1999".
Sadly the post is not up on his website anymore, lost to some restructure:
I asked my Dad (70 years old) if he clicked on any advert on Facebook or Google and he had not. Even car sharing companies that make about 6$ a booking need to do a lot of bookings before they turn as much profit as, say IBM.
I am selling.
It's disproportionately being moved into IT because it's one of the few markets that still seems to have the ability to generate a positive ROI, although that's probably been priced in already by now.
That would mean that when the market recovers and 'regular' investments like housing, construction, manufacturing, finance etc. start generating returns again the current craze will just die down rather than pop like a bubble.
It seems to me like the difference between hoarding tulip-bulbs during the mania to get rich vs. hoarding them during World War II to have a source of food as a last resort.
That's a bold assumption in itself already.
And finance. Oh finance. Like we need Yet Another Financial Product To Fuck Us.
Returns? Its hard to generate returns when the majority of your population is shifting towards retirement (in the US) and the wages of your up and coming audience/consumers (18-45) are anemic at best (if there at all).
Let's say that IT will account for 20% of a post-recovery economy. In that case replace my enumeration of a few markets by 'whatever makes up the other 80% of the market.'
The defining characteristic of bubbles is irrational exuberance—everyone feeling that the sky is the limit.
Instead, we have an environment where articles like this come out on a regular basis and I probably hear "when this bubble pops" daily. Everyone is afraid that we're in a bubble. So we're probably not in one.
Be greedy when others are cautious. Since the pundits are cautious, it's probably a good time to invest.
Huge up-and-coming developing regions - pretty much anything outside of US and Europe - will vacuum anything that tech can produce. The correction of tech industry from Western world to the rest of the world may be a little bit uncomfortable for those who miss it, i mean it is time to learn Chinese and Spanish this time not Java :)
Come on NYT...