The First Dot Com

I Came across a very interesting article written by Donald S. McAlvany, the Editor of The McAlvany Intelligence Advisor (Phoenix, Ariz.)

He compared the present Internet/dotcom high tech mania to the Dutch Tulip Mania of 1637. In the early 1630's the Dutch began to import tulip bulbs from Turkey. Breeders had created wonderful new varieties, and, at first, only the very rich were interested in these curiosities. Owning these new exotic varieties became a symbol of wealth and discernment. While Dutch society was hierarchical, with great divisions between the rich and the poor, it had superb social communication and the lower classes were anxious to replicate elite taste. So the less wealthy also caught tulip mania. Eventually breeders sold options at increasingly silly prices, on new breeds to be released next season.

If the most successful Internet retailer in the world, Amazon.com cannot make a profit -- and indeed loses money on every book sold -- it begs the question "Where's the beef?"
This experience is instructive. There are two very important aspects in this affair. First, involvement was very widespread penetrating from the elite down to the lower classes. Second, prices soared because participants were confident they could sell their options at a substantial profit. Eventually very few people were interested in the tulip; most were interested in the option and got caught up in the speculative mania.

The whole mania collapsed when suddenly the prices seemed too high and no buyers could be found for options. One day it seemed reasonable to sell an option on one tulip bulb of novel breeding and characteristics, for the equivalent price of a house. But on another day, there were no buyers. There was no more orderliness in the market; an avalanche of sell orders swept through the empty halls. There were almost no buyers because tulips have little intrinsic value. They fleetingly had exchange value, but once the speculative bubble was broken, the tulip no longer looked exotic. It ceased to be an asset, creating wealth or income, and was transformed into a measly flower.

For those readers that have their 401Ks or personal investments heavily loaded with Internet stocks, there should be some consideration given to the possibility that Internet stocks will cease to be tulips, and become common flowers.

Don McAlvany asked the question "Where's the beef?" noting that thousands of stocks have been floated with no earnings, flimsy business plans, and no other purpose than to have their founders make millions on inflated stock prices. Very few Internet companies produce a product, not to mention making a profit from the production and sale of that product. They sell someone else's product at a heavy discount, or a service to other Internet companies. If the most successful Internet retailer in the world, Amazon.com cannot make a profit and indeed loses money on every book sold (Amazon's stock has dropped 47% since 12/10/99), it begs the question "Where's the beef?" A recent Wall Street article projected that less than 40% of the dotcom companies will have any earnings before 2002.

The Web site InsiderScores.com recently wrote that in February sales by corporate insiders - mostly officers and directors - at the 100 large companies that make up the NASDAQ sold $4.5 billion worth of shares. That was more than insiders in all U.S stocks combined sold during the same month.

This might point to the feeling that those with the most intimate knowledge in the dot.com world are beginning to see that tulips may be no more than measly flowers.