If there is a time when the phrase “history repeats itself” holds true, it is in the stock market. From the first classic Tulip-omania “crash” in 17th century Amsterdam to the more recent technology market “deflation” in the United States, the stock market has experienced repeated incidents of such nature. There is without a doubt that we can expect these “bumpy roads” ahead of us in the future.
The most commonly asked question is “why”? The answer is really in one word:
Euphoria
Ray Noorda, a Dutch billionaire who raised Novell to where it is now, said it best:
“The five ‘E’s’ of a new business: Enthusiasm, Excitement, Exuberance, Euphoria, Extinction. Watch out for the fourth ‘E.’ It might bring you to the fifth.” – Global Technology Business, The Grandfather of Technology Entrepreneurism, March 2000.
This clearly represents the nature of information technology in today’s stock market. The grand excitement and unwarranted speculation has driven stock prices through the roof. Just recently did the public realize the immense “euphoria” they are captured in, and so decided to escape to proven profit-generating corporations with long-term growth.
Information technology businesses and dotcom’s have focused on running their business through speedy mechanisms without much concern for looking into the future. Ray Noorda stated something very similar to this concept:
“Business is run by four-letter words: Plan, Make, Sell, Ship, Cash, Fast. And if that isn’t enough, you have to add Hard, Work.” – Global Technology Business, The Grandfather of Technology Entrepreneurism, March 2000.
The problem is that most of today’s dotcoms have not focused on the one thing to make them last: cash. This leads to negative or low profits, and eventually to “extinction.” This in itself is enough reason for any wise investor to back away from such companies, thus leading the rest of the investment crowd like sheep in a herd.
Based on all this, if it is not enough to be convinced of this repetitive nature found in the stock market, comfort yourself in a book which comes highly recommended:
A Short History of Financial Euphoria by John Kenneth Galbraith.
Finally, devote some quality time at The Motley Fool.