Little guys coat-tailing to market madness

The Stock Exchange ticker for lastminute.com shares last week was telling. Scores of small trades of 35 shares each dribbled through the market as unhappy private shareholders, finally in receipt of their much-delayed share certificates, cut their losses and sold out of the blighted internet stock.

But lastminute's woes were swamped in a flurry of collapsing share prices as the market appeared to suffer from a hi-tech hiatus. And if a new book, to be published this week, is to be believed, worse is on the way.

Irrational Exuberance takes its name from famous comments by Alan Greenspan, the US Federal Reserve Board chairman, who tried to calm the sharp rise in stocks on Wall Street over two years ago. Written by Robert Shiller, professor of economics at Yale University, it has already caused a stir in America, with its dire predictions of how the dot com bubble could burst, sucking wealth not only from private investors, but also from pension funds and the economy at large.

Mr Shiller says the current overheated market has been created by a series of factors, largely created by the long bull run in the US markets, now more than a decade old. This has created an expectation that investments can only go up, a herd instinct fed by ever more optimistic predictions of economic growth and its effect on the market.

"Among the unanticipated consequences of today's investment culture is that many of the tens of million of adults now invested in the stock market act as if the price level is simply going to keep rising at its current rate," writes Mr Shiller.

"Their logic is apparently consistent with the free-rider argument - if millions of researchers and investors are studying stock prices and confirming their apparent value, why waste one's time trying to figure out reasonable prices? One might as well take the free ride at the expense of these other, diligent investors who have investigated stock prices and do what they're doing - buy stocks!"

But Mr Shiller argues that these analysts, on whom everyone is relying, know little and are treading a dangerous path. He points to the "troubling lack of credibility in the quality of research being done on the stock market, to say nothing of the clarity and accuracy with which it is communicated to the public. Some of this so-called research seems no more rigorous than the reading of tea leaves."

Mr Shiller has spent the last few weeks meeting securities analysts and investors in the US who are keen to try and debunk his theories of doom and gloom. But he told The Independent on Sunday he was sticking to his guns. "I think that a fair enough prediction for the Dow Jones index in 2020 is 10,000," he said - it closed at nearly 11,000 on Friday. "The market is so overpriced that it is crazy to predict it will continue to rise."

So, being frozen out of dot com flotations may not be such bad news.