Post of the Day
January 13, 1999

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Subject: Commodities, not stocks.
Author: IFindKarma

intumesce, v. intr.: 1. To swell or expand; enlarge. 2. To bubble up, especially from the effect of heating.

Dow 9500, I'm amazed to have seen you already.

That said, I'm really not convinced the Internet bubble is going to pop anytime soon. The reason, simply put, is the high number of new people getting online brokerage accounts -- thousands of new accounts per day.

Many of these people are not Economist readers, and they know little of fundamental valuations. They know very little of technical analysis, too, mind you -- all they know is a few hundred companies they've heard of, plus things they've heard from friends and on television.

The companies they've heard about over and over again are the large caps -- heck, go to any Motley Fool model portfolio and you'll see a bunch of large caps. Increasingly, because they use the Internet to trade stocks, and because they've been flying so high lately, these people have also heard about the Internet companies.

"...what we're witnessing is an incredible pyramid scheme where the thing that causes the bubble -- the Internet -- IS the medium by which the participants of the pyramid do their gambling."

So they get online because everyone is telling them that there are so many useful things online. And they get their online brokerage accounts, because *everyone* is telling them that investing their money is a far better way to appreciate their wealth over time than just saving it in a mattress or a bank.

Like Peter Lynch, Warren Buffett, and The Motley Fool, these people proceed to buy a company they know. Coca Cola. Pfizer. Ford. Schwab. Apple. Microsoft. Intel. Cisco. Dell. America Online. Yahoo. Amazon. eBay. And their buying these companies, combined with the instutitional investors doing nothing but holding the companies they already owned, makes the prices of the respective stocks go up. Most of these people don't know what the market caps of these companies are, and they don't care. All they know is that they want to own part of a company they know. And when they do buy a company like Microsoft or Amazon and the share price appreciates considerably (MSFT was up 120% last year alone, AAPL was up over 200%, AOL 500%, YHOO 700%, AMZN 1000%!), they tell their friends and family.

As Chalice pointed out, what we're witnessing is an incredible pyramid scheme where the thing that causes the bubble -- the Internet -- IS the medium by which the participants of the pyramid do their gambling.

The bottom line: the stock shares of these companies trade not like STOCKS but like COMMODITIES. I'm not the first to say it, and I won't be the last to say it, either. But think about it: there is a limited supply of shares out there -- Microsoft only has 2.5 billion shares, Amazon has only 158 million shares, etc. Actually, that's just the number of outstanding shares -- if you take out all the institutions and insiders who own shares, the effective floats of these companies are much, much less.

And the thing that every fledgling economist first learns is supply and demand: if there are only 20 million AMZN shares in the float available for trading, and each of 3 million Amazon customers wants to own 100 shares of AMZN, what do you think is gonna happen to the stock price?

The thing to remember is that the number of entrants into the Internet is going to appreciate for the foreseeable future. The Internet is not a fad, period. And so the cycle continues to repeat itself.

Meanwhile, there's another group of people who are smart enough to know this is a bubble but stupid enough to think they can profit by shorting stocks like MSFT, INTC, CSCO, DELL, AOL, YHOO, AMZN, and CMGI -- or worse, some of the lesser known Internet stocks. The problem with this is when you pair it with the phenomenon of the number of Internet brokerage accounts increasing. More people get online, more people open investment accounts, more people buy the companies they know, the prices of shares of those companies rise, and sooner or later these idiots who short the companies without observing the larger phenomena in play get "squeezed" -- a margin call from their brokerage accounts means they either have to put up more money to stay short, or cover the short by buying the stock at the current price. What's amazing is that this keeps the stock price rising, which in turn causes new people to want to short at the new stock prices. Heck, if the prices were way too high before, they're certainly too high at levels even higher, right? And the cycle repeats.

"The thing to remember is that the number of entrants into the Internet is going to appreciate for the foreseeable future. The Internet is not a fad, period."

So the price appreciations of MSFT, INTC, CSCO, LU, DELL, AAPL, IBM, AOL, YHOO, AMZN, CMGI, etc etc etc -- though I believe they do represent a mania with all of the bad connotations that word has -- will probably not stop as soon as we think. What needs to happen to make the bubble burst is:

1) Conditions get better in the rest of the world so international capital finally flows out of U.S. stocks and into countries that need the money for actual growth (imagine that),

2) The number of people getting online starts to slow down (and we know this isn't happening anytime soon),

3) The institutional investors decide to start dumping shares in classic pump-and-dump fashion (but I don't think they'll do this because they know there's a lot more money to be made here by holding for now),

and 4) Something happens that finally stops people from shorting these high flying stocks (how likely is it we'll see regulation attempts in this anytime soon?).

Until then, I really expect the stock prices of the high fliers to keep appreciating. And in one sense, as Rimpinths and others in the Communion of Bears have pointed out, this is a really sad tulip craze. In another sense, though, it is the best thing that could happen for humanity: the flight of capital into technology stocks in particular means more investment in technology, which ultimately will give humanity many more great advancements. This is not a mania like tulip bulbs or even precious metals where people are buying things that are essentially useless in and of themselves. This is a mania where people are buying the right things for the wrong reasons, and the flight of capital into technology is gonna make technology improvements come bigger, better, and faster than they might have otherwise.

Anyway, that's just my opinion, I could be wrong... but if I'm right, when and if these stocks' prices do go down, they'll drop faster than they shot up. Just a caveat for anyone who believes there's such a thing as easy money.

So what do my observations have to do with CMGI? Well, I believe that more and more, people are going to hear about CMGI and CMGI-related companies. You think Lycos, Geocities, and Reel.Com are getting bigger? You haven't seen anything yet -- there's more than two dozen more of them in the pipeline right now, and CMGI has three venture capital arms looking through hundreds of business plans a month to add the best ones to their empire.

Whoops, Yahoo's market cap at $36 billion is now bigger than Sprint, CBS, and Seagrams, just to name three examples. Yahooooooooga! Heck, at $22 billion, Amazon's market cap is bigger than Seagrams, too. Amazing! And with a market cap of almost $4 billion (as of CMGI's closing price today above 170), it looks to me like CMGI has plenty of room to grow.

And it will be interesting to see what comes next for AOL, YHOO, and AMZN ... will they use some of their newfound paper wealth to buy other companies and start new ventures? If they're smart, they will. CEOs Steve Case, Tim Koogle and Jeff Bezos are smart people. Perhaps they'll even buy a CMGI-related company or two -- Amazon already did it once last year. Since it bootstrapped itself up from nothing, CMGI has been using the strategy of acquiring companies for five years now. CMGI's CEO David Wetherell is a genius.

So I'll continue to long-term hold my shares of CMGI, AOL, and YHOO -- and even the pitifully small amount of AMZN I kept after I selling most of my AMZN in November to buy more AOL and CMGI. I believe the best is yet to come.

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