Anthony Hilton: Facebook flop is really no great surprise. Remember the dot.com debacle?

The lesson... is that an internet stock is worth what the seller thinks he can get away with

The surprising thing about the embarrassing flop of Facebook is that anyone is surprised. Back in 2000, Michael Lewis, the one-time bond trader turned author, wrote an early expose of what went on in the the dot.com bubble at the turn of the millennium.

Two quotes attributed to the bankers and internet pioneers from that time have never left me. The first – and I paraphrase because it is from memory: "I never understand why journalists expect to be told the truth. The share price is far too important for that."

And the second: "You sell a bad company the way you sell a bad movie. The IPO is the premier and the trick is to hype it so much that everyone rushes to see it on the first weekend. By the time word of mouth spreads that it is rubbish they have already parted with their money."

That was then and the people are different now, but I have limited sympathy for anyone who bought Facebook because dot.com mania is not that long ago. The lesson from those days is that the valuation of an internet stock is what the seller thinks he can get away with, and as a further rule of thumb it is normally a bad idea to buy something when an investment bank is the seller because it is always going to know more than you.

But there is a wider economic point made by Warren Buffett, arguably the world's most successful investor. He says the investor should never confuse an innovation which transforms society with the opportunity to make money. Thus successive generations of investors who failed to heed this rule have lost fortunes by trying to get in on the ground floor in automobiles, in radio and television, in airlines, in personal computers and now the internet.

Such failure is predictable, says Mr Buffett, because innovations are glamorous and exciting, and therefore attract far too much capital which leads in turn to intense competition. In such a febrile atmosphere no firm retains an advantage for long, and others leap ahead of it before it has had an opportunity really to make money. Most fall by the wayside. Once there were hundreds of car companies, radio manufacturers and personal computer firms. Long after the event there are two or three winners, but you can never predict which these are likely to be at the beginning of the race.

a.hilton@independent.co.uk

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