A technical view of investor greed

The Internet Bubble by Anthony B Perkins and Michael C Perkins (Harper Business, $27)
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The Independent Culture

The timing of the publication of this book is entirely appropriate, given the present turmoil in the technology and internet sectors of the stockmarket.

The timing of the publication of this book is entirely appropriate, given the present turmoil in the technology and internet sectors of the stockmarket.

The authors Anthony and Michael Perkins have long been considered the most respected commentators on the sector. They were the founders of Red Herring which has become one of the leading publications within the global technology sector. One could argue that it was the authors who created much of the interest within the sector and broke down the barriers for the retail investor.

This book offers the reader a view inside the rarified atmosphere of Silicon Valley, how the financiers make their money and what the investor should always look for to avoid sell-offs.

The authors initially focus on some of the leading names within the internet sector, notably Amazon and Yahoo! where high-profile players have accumulated huge paper fortunes. These individuals were the pioneers of the sector when global companies could be created at university or in suburban garages.

But those days have gone, as the internet permeates more market sectors. The internet is big business with many of the traditional demarcations beginning to blur. In two years, the term "internet company" may begin to look outdated.

The internet sector has been one of the biggest wealth creators in history. In the second half of 1998 and the first half of 1999, investors made average returns of 400 per cent. So the argument by the authors that the sector was susceptible to a correction was rather obvious, even without the benefit of hindsight.

This is one of the troublesome aspects of the book which is largely technical and heavy, and so not immediately appropriate for the average reader. The sophisticated investor would have already appreciated that this level of supernormal returns was not sustainable over the long term. The concern is that such returns have driven the "herd mentality" which is a classic feature of a bubble. As the book highlights, in early 1999 stocks accounted for 50 per cent of US household assets.

In the long run, across all market sectors, there are numerically far fewer winners than losers. Since 1980 within the technology sector, 5 per cent of all companies have created 86 per cent of the wealth. One key aspect picked up is that companies are being created simply to float and make short-term returns rather than to build long-term companies.

One particular statistic from the book I like is that, of the new issues in 1997, one-third of the companies lost money. But of the companies to list in the first half of 1999, the same proportion of companies actually had no revenues. It is not surprising investors have become unnerved by such metrics. The market had become dominated by momentum, online trading and bulletin boards. Day traders account for a large amount of the volume on some of the major exchanges.

The book is very much US-centric, with elements of little interest to the international reader. I found the middle section of the book heavy going, dominated by venture capitalists and bankers. Some of the main characters of the business are highlighted, individuals who are made to look greedy and unconcerned about the investors. Quotes such as "It's the Wall Street way - we are as greedy as hell" indicate the overall sentiment.

What does become clear is that there are many "me too" companies joining the market, almost a lemming approach. The large number of IPOs are also driven by the investment banks, where the deal flow is vital for future business. An aspect highlighted by the book is the almost total lack of impartiality by analysts, who generally give investors little clue when things are going wrong. In 1998, from a study of analyst's reports on 6,000 stocks, only 1 per cent were sell recommendations.

I would question part of the title which points out that the book will tell investors what they needed (and need) to know to avoid the shakeout. All the book achieves is to highlight the huge capital returns US investors have made in the internet sector and that it cannot go on forever. What would have been useful would be a global view on the sector, because the reader is left thinking nothing exists outside the US. There are patriotic statements arguing it is no surprise that the boom took place in the US - after all they built railroads, reached the moon, built the microchip etc etc.

Overall I found the book interesting but not necessarily enjoyable. Good points and the main thrust appeared to be lost under long tedious sections. Technology and the internet are certainly no guarantee for a brighter future, but will offer the platforms for greater choice and accessibility. The internet is not a guarantee to make money and will be subject to the traditional business cycles in the underlying industries.

The authors had an excellent opportunity to study one of the most fascinating sectors in our lives and in stock markets, but they somehow missed the mark.

The reviewer leads the global internet team at Framlington Investment Management

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