Mr.Market’sBipolarDisorder 9public offerings (IPOs) of Internet stocks were launched, many in
the same industry where it is going to be impossible to have more
than a handful of profitable companies. Deals included, for exam-
ple, 17 health-care related companies, seven business-to-business
e-commerce companies, six music distribution companies, five em-
ployee recruiters, and three travel agencies. It starts to sound like
the “Twelve Days of Christmas.”
Driving this funding is the fascination with technological inno-
vation, a fascination that characterized previous market bubbles as
well. The 1960s technology bubble arose from innovations such as
color television and commercial jet aviation. It spawned an IPO
boom in electronics and other businesses whose names ended with
“tron” or “onics” not unlike that of 1999’s dot-com boom.^6 Takeovers
surged in both periods, fueled by high-priced stoc kthat built many
corporate empires. All the tal kwas of a new history-defying era—
called a “new paradigm” in the 1960s and the “new economy” in the
late 1990s and early 2000s. But as Warren Buffett quotes Herb Stein
as saying, “If something can’t go on forever, it will end.”^7
The Internet bubble may not end as abruptly as the 1960s elec-
tronics bubble did. It may instead follow the path of the stoc kmar ket
bubble in Japan in the 1980s, which ended in a gradual and total
erosion of stock prices in the Nikkei average throughout the decade
of the 1990s. One thing the two periods have in common—and one
of the most striking common features of speculative bubbles gen-
erally—is the emergence of “new” ways to defend the high prices.
In 1980s Japan the fuel was stoc kprices based not on the earn-
ings or cash that can be generated by a business, but on underlying
asset values the businesses owned, which themselves had been rising
to the stratosphere as a result of aggressive real estate speculation.
We’ll soon see that the same alchemy plagues the turn of the twenty-
first-century United States.
These examples merely manifest in U.S. stoc kmar kets the emo-
tional drives inherent in human market making, exemplified more
generally not only by the 1980s Japanese experience but by classic
episodes of bipolar disorder such as the Dutch tulip bulb mania of
the 1630s and the British South Sea exuberance just prior to 1720.
In each of those cases—as in most others—the initial reason to buy
may have been sound. Rare tulip bulbs in Holland were valuable
because the novelty of that flower in Holland turned it into a status
symbol. Shares of Britain’s South Sea Company were valuable when
it began to exercise its royal grant of monopoly trade with Spain.