There’s a Bubble in Talk About Bubbles

There may or may not be a bubble in Internet start-up valuations.

But one thing in which there is definitely a bubble is in talk by journalists, investors and anyone else looking to raise their online profile through constant punditry about bubbles.

A recent Google News keyword search for instances of “Internet” and “Bubble” within the last day unearthed 960 links. Over the past week, it was 760 (Yeah, I know logic dictates there should be more matches over a week than a day, but that’s what the search results said.)
Facebook, Twitter and Zynga are bubbles, says one. Is Yelp: the dot com bubble part deux?, asks another. One more asks: Is Twitter the harbinger of the second bubble?

peHUB likes to talk about bubbles too. Connie Loizos drew a lot of commentary after publishing an interview in which Mark Cuban, who made his billions on during the last bubble, compared the current cycle to something more like pyramid scheme (subscription required). Greylock’s planned $1 billion new fund is the latest sign of an Internet bubble, writes Mark Boslet (subscription required).

It’s easy to dismiss some of the pontificating as merely symptomatic of a repetitive business news cycle in which journalists routinely hype a company early in its existence, then, when it gains traction and Wall Street favor, decry it as overvalued. But upon perusing some of the bubble-related pontifications, it became clear that much of the analysis goes beyond that formulaic approach.

Having experienced speculative manias and over-corrections to the downside in virtually every asset class over the past decade, it seems the question isn’t really whether something is over- or under-valued. The question is, when is the right time to enter and exit a market characterized by cyclic speculation, paranoia, and irrationality masquerading as logic?

On this front, one of the more interesting bubble articles was published a little over a year ago by Henry Blodget, the former Wall Street analyst probably best known for putting a one year price target of $400 per share on at the height of the last dot-com mania. “After decades of increasing financial sophistication, weren’t we supposed to be done with these things? Weren’t we supposed to know better? By late 1998, I was cautioning clients that “what looks like a bubble probably is,” but this didn’t save me. Fifteen months later, I missed the top and drove my clients right over the cliff,” he writes. Blodget says he experienced the next bubble as a homeowner. There, he made the opposite mistake–selling his New York home too early, in 2003, and walking away from what would have been another few years of double-digit price increases.

Part of the problem is financial success is judged not in isolation but in relation to one’s peers. Thus, a financial manager who makes 10% in a year when peers make 20% looks like an under-performer. By the same token someone renting an affordable apartment feels fine in a normal economy, but not during the housing bubble, when mortgaged-to-the-hilt homeowner neighbors were rolling in equity. So, we’re driven to speculate just to keep up with those around us.

By some measures, it’s refreshing that the latest assets susceptible too rapidly-accelerating-valuation syndrome are private shares. One of the advantages of shares, as opposed to say, an expensive house, is the ability to lock in gains by selling a portion, while still holding some should valuations soar to ever-higher levels. Of course, as Cuban points out, there’s still going to be someone left holding who paid that unfortunate peak price.