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EJ from in the limelight

Posted By: Sleeping Bear
Date: Thursday, 16 March 2000, at 11:35 a.m.

[EJ was one of the regulars, from a while back, over at the PruBear Chat]

Thursday March 16, 8:28 am Eastern Time
FEATURE - Bubble, bubble, dot-com trouble?
By Sara Ledwith, European Technology Correspondent

LONDON, March 16 (Reuters) - How many people would put their money in ``a company for carrying on an undertaking of great advantage, but no one to know what it is?''

In the 18th century, 1,000 shares were sold in just such a London venture, raising 2,000 pounds for its founder. He took off for the Continent and was not heard of again.

With talk mounting of an ``Internet bubble'' in the early 21st century akin to the South Sea Bubble that ruined thousands in the 1720s, financiers now see plenty of hollow-looking business plans aiming to cash in on the Net's low cost and high returns.

At technology advisors Richard Holway Limited, analyst Max Thowless-Reeves has just junked a proposal for a Swedish site inviting visitors to contribute an idea for what a company could do. The ``winners'' would get a 95 percent stake in the outfit.

``You get ideas like that popping up and that's just farcical,'' he said. ``But on the other hand, Internet companies are taking advantage of current conditions to raise cash -- and they're absolutely right.''

Like the vision of wealth in South America's gold and silver mines that fuelled stock in the South Sea Company, or in early railways or cars or a host of other new projects in their time, the Internet in Europe now is attracting more money than sense.

But as Internet stocks begin to saturate the market and borrowing costs look set to rise, concerns are mounting that the bubble will deflate.


But none of this means ``the Internet'' as a whole is a foolish or legally dubious area to invest in. It's just that common sense is not much help, and neither are the experts.

At the heart of the craze for ``dot-com'' investment is the fact that, partly thanks to the Net and cheap credit conditions, the new technology has grown faster than most experts had believed possible. New Net users in Europe were logging on at the rate of one every 1.43 seconds between 1998 and 1999.

Overnight, Internet sites like Yahoo! (NasdaqNM:YHOO - news) blossomed from a tiny bright idea into profitable ventures and made money on very low capital outlay.

Now many experts argue that forecasts of 60 percent annual growth in corporate Internet spending by 2003 might prove conservative. Respected technology analysts Gartner put the value of business Internet at over $7.3 trillion by then.

As they seek to compensate for past oversights, experts such as these fire even broader enthusiasm, and with it the ``greater fool'' principle that underlies all market manias.

Even if you know a scheme is ill-founded, enough idiots will buy into it for you to win -- a fact that has forced today's regulators to rethink the rules.

In Charles Mackay's 1841 account of investment bubbles, ``Extraordinary Popular Delusions and the Madness of Crowds,'' the author lists over 100 scams which were decreed illegal and abolished in 1720 in Britain.

From a company ``for trading in hair'' to ``a wheel for perpetual motion,'' the ideas are, with hindsight, amusing. But with imagination and a dash of technospeak, some become plausible by the addition of an ``e'' prefix or ``dot-com'' suffix.

``I have come to the conclusion that almost all Internet stocks are only making money out of the same mechanisms that apply in pyramid schemes,'' writes a contributor to a Motley Fool discussion board under the name Jonathan Scott.

``The money people are making is actually the money of the investors that follow, not the money made by the dot-coms themselves. Eventually all pyramids collapse when the number of lemmings entering is not enough to sustain the illusion.''


There are bubbles and bubbles. Europe's ``tulip craze'' in the 1600s, when people would pay thousands of florins for a single tulip bulb, was founded purely on sentiment, rather than on underlying deep change like that brought by rail travel, for instance.

Similarly, many people can see the underlying importance of the Internet, and even as media attention mounts on Scott's ``Internet lemmings'' there is still money to be made on bringing investors ``inside the bubble.''

Investment bankers are fine artists in gauging stock market fashions, and are laying the ground for all the phases of ``dot-com'' delirium right up to the day when the Internet is no longer fashionable.

``I think Internet service providers are yesterday's market,'' said one banker of the companies he is looking to bring to market in the coming months. ``I'm looking at software related to the Internet, and hubs for business-to-business trading.''

Another top Internet analyst jokes that he'll be ready to move back into looking at the retail sector after two to three years, when the Internet has become so much a part of everyday life that, like the trains we take to work, it excites no one.

And even doomsday prophets can make money on the Internet. As more and more people fear the bubble may burst, that could bode well for websites like

Founded in 1998 as a parody of an Internet e-commerce company, it highlights the Net's resemblance to the tulip craze.

``Buy an stock certificate,'' it exhorts visitors. ``Not only does not have any assets, revenues or profits, it doesn't even exist.''

But the stock certificates are on sale from $10.95 and founder Eric Janszen, an angel investor in Internet ventures in real life, says site visits are picking up.

``When the market goes down visits to the site shoot up,'' he said by telephone from Massachussetts. ``I wouldn't necessarily say it's going to make a profit, but it does bring in money.''

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  • EJ from in the limelight (views: 3855)
    Sleeping Bear -- Thursday, 16 March 2000, at 11:35 a.m.

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