Paul La Monica shares my concern that today’s market is reminiscent of the dot-com bubble of 1999. The bubble, if it exists, would be evident in higher than expected valuations for private companies like Facebook ($75 billion) and Groupon ($25 billion), not to mention Huffington Post’s recent sale to AOL for $315 million. In his article, Paul also refers to a few publicly-traded companies whose valuations are extraordinarily high compared to their earning estimates.
For companies whose shares are trading on private exchanges like SecondMarket, the hypothetical bubble may not affect most investors. I’d be concerned once Facebook, Zynga, and Twitter go public, though. These companies will probably go public at some point to take advantage of an influx of cash from a wider array of investors.
It just goes to show that some things really haven’t changed since 1999. The dot-com sector, like any other, has its winners and losers. Investors have to do their homework to find the former and steer clear of the latter.
It’s easy to judge Pets.com as an imminent failure after the fact, but it’s much more difficult to identify over-exuberance when it is happening. Doing homework and studying financial reports isn’t going to be enough when and if the bubble bursts. Right now, most investments seem historically high — tech stocks, oil, and gold, for example — while the only type of asset that seems to be laying low, at least when compared to values for the past several years, is real estate.
Just as it might be the best time to buy houses, particularly as an investment, it’s more difficult to get loans to do so on a leveraged basis. Buying low and selling high isn’t always as easy as it sounds with certain forces, putting aside investor behavioral psychology, work against you.
Published or updated March 31, 2011.