[The S&P 500 peaked on March 24, 2000, if we adjust for price inflation. This newsletter was sent on March 3, 2000.]
The mark of a mania is when the general public senses that it has been left out of the cornucopia of great wealth. People think they had great wealth in their hands — almost — but somehow they missed out. They begin to get frantic, looking for a way to get onto the one-way road to Easy Street. They follow the trends. They buy whatever has already gone up by three or five to one. That’s where we are today. Investment magazines run cover stories about getting rich. The assumption is that great wealth is for everyone. On the cover of Money (May 1999), we read:
Tech Stocks: Everyone’s Getting Rich!
Here’s how to get your share
This creates a terrible sense of longing in the hearts of those — virtually everyone — who failed to participate. So it has been with every mania. The signs of it are all around us.
The fact is, great wealth is not for everyone. Everyone can’t possess above-average wealth. Great wealth is for unique individuals who create wealth for large numbers of people through vision and good timing. In most cases, these wealth creators work maniacal hours, are obsessed with their work, and take extreme risks. And for every success there are dozens of failed ventures that the public never hears about. Most people cannot live this way. Long economic boom periods foster the perception that the road to riches has an on-ramp just down the street. We are now in month 108 of the longest economic boom in American history. In booms, the stock market rises steadily, then sections of it rise exponentially. But this is a statistical phenomenon.
A few stocks soar, carrying up the numbers on certain indexes. The Internet stocks seem to be booming. They really aren’t. On February 16, USA Today ran a story on the bursting of the Internet bubble. On average, each stock on the Internet 100 was down 38% from its high. But people’s perception will take time to come to grips with the reality of this market.
These markets are narrow, and the stocks that push them up are fewer still. When the public learns of great wealth attained by investors in these stocks, they call their brokers and buy. But a rational portfolio would include very few of these stocks. So, anyone who got truly rich by buying them was lucky. He abandoned a rational investment strategy.
When the public starts crowding into a narrow market, and the tech stock mutual funds are flush with cash, they compete frantically against each other. It’s not just here in the United States. The tech stock mania has hit Japan. Fortunes are being made on paper. An example is Toshisihiro Maeta, a 34-year-old mechanical engineer. He created a company in 1996 that offers cellular phone services. Cell phones are big in Japan: 53 million of them. About a million and a half people use the services of his company, MT1. It pulled in $70 million in revenues (not profit) in 1999. That’s nice, but not spectacular. The shares were offered to the public last October on the over-the-counter market. The public bid up the price 67-fold: 2500 times earnings. The value of Maeta’s shares total $4.5 billion.
But he is a piker compared to Yasumitsu Shigeta; the 34-year-old president of Hikari Tsushin, which sells cell phone services, too. The company adopted this marketing strategy when the Japanese market for cell phones was deregulated in 1995. In 1999, the company’s market capitalization hit $40 billion. Shigeta owns 62%. He was briefly worth $25 billion.
This is what the pseudonymous author Adam Smith (George Goodman) two decades ago called supermoney. Create a company, sell a small portion of the shares to the public, retain the lion’s share, and get rich on paper. The only problem is, you can’t live on the earnings. There is no income stream to speak of. So, to cash in, you must sell out, slowly. That’s what Bill Gates is doing, except that his holdings are too large to sell out in a lifetime.
The game is called imputation: multiply the price of the latest share sold by the shareholdings that are unlikely to be sold. Presto: you’ve got supermoney. You can spend it, too. The main thing you can buy with it these days is brilliant, talented young people to work 80 hours a week. It’s called stock options. The high tech world uses this currency more than any other industry. The trouble is, someday those options will be exercised if the company is profitable. The company will then have to issue new shares. A hundred years ago, this practice was called watering stock.