Tuesday, March 21, 2006

Revolutionary Products & Market Bubbles

Generally, when there are market bubbles, it will be because of some over-hyped technology or revolutionary product that is predicted to change the world we live in. When these hypes or revolutionary ideas fail to rise to expectations, thats when bubbles deflate rapidly. Back about a year before the dot com bust in 2000, the renowned Barton Biggs (investment strategist for Morgan Stanley then) was at a conference thingee where he was supposed to give an address, sharing the stage with an academic (whose name I have forgotten now) who predicted that the Dow is undervalued and that in 1999/2000 was the last time to buy before it rockets to the next level - 36,000! Now, they were all in the midst of a dot com frenzy and internet-taking-over-the-world stuff. Naturally Biggs got slaughtered by the crowd's response as he mentioned that the dot com frenzy has led to stretched valuations and is bubble-like.

The interesting thing is that the Mr. 36,000 academic (who has sold hundreds of thousand of his book on how not to miss the 36,000 Dow... or something like it) emphasised that the internet is revolutionary and that Biggs and other bears do not understand the technology and implications.

The lesson here is, whenever there are revolutionary products, investors will go overboard and latch onto a group of stocks and deemed them as future kings. Each hype we go through will almost certainly involve thousands of companies jumping on the bandwagon, but no matter how revolutionary, less than 1% will be able to make consistent real long term money from it.

The internet is an excellent example - its impact is wide ranging and touches almost everyone's life in some way. No one can envisage NOT being in contact with the internet one way or another on a daily basis. Still, how many hundreds or thousands companies do actually make super profits. There is Google, e-Bay, and a few others... again much less than 1% from those getting funds from venture capital firms in the late 90s. What Mr. 36,000 missed out on is every new revolutionary product will produce "madness of the crowds". Mr. 36,000 needed to know that market bubbles are NECESSARY whenver new technology or revolutionary product is available - they are necessary as we need large sums of capital to concentrate on exploiting the "value-addedness" available in this new technology - even though less than 1% will survive, we are all better for it in the longer term. We need to try 1,001 things we could do with it.

Just look at when mobile phones took flight, we also had a carnage. Or when 3G was made available, again many firms lost a lot of money. So, market bubbles are necessary, so too is the inevitability of a market correction. The thing is only a very small number of companies will make money, that's the natural law of business and capitalism. You just cannot have thousands of company making supernormal profits owing to a revolutionary product because competitors and new entrants will come for your market share, go for lower margins, make more innovations, get more value-addedness on the product, etc...

Back to the internet, though it is life changing and very pervasive, internet still lags a few other revolutionary products of the past in terms of importance and impact. Okay, lets say electricity, that's a given, so too is the motor car. Another is air-conditioning - we so take air-con for granted as part and parcel of daily life. If we do not have air-con, do you think there will be high-rise buildings more than 5 storeys, or the lead-on effect of migration of population to cities, etc... As impressive as the internet is, there are still a lot of successful people who do not need to use it to get by. I grew up for the first 25 years of my life not needing a mobile phone - why do we need to be able to be reached at any time, anywhere by anyone? Of course now, you cannot imagine living without it. Still that gives the internet and mobile phone a sense of reality in their degree of importance (or lack of) on the revolutionary curve of things.

So the next time you get a sales pitch on the next big thing, beware, there will be a market bubble, and there will be a market correction ... the next big thing could be: the "no-side effects, eat all you want, guaranteed 10kg a month weight loss pill"; or the pill to cure cancer of all kinds; or the new resuscitation machine that can bring life back to any one who has died not more than 24 hours; or the new sugar which has one calorie per teaspoon but does not taste like cardboard on your tongue; or the new mobile phone that charges by itself using sunlight; better still, the car that can run on sunlight as they have made solar cells small, light and efficient enough; or the revolutionary Viagra in a tube, just rub it on, non-toxic and works within 5 seconds, edible too...comes in strawberries, banana, apples,...." (I think the Viagra idea will be BIG man...).

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