Tulips and Technology

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Chidem Kurdas

Next month it will be 16 years since the Nasdaq index reached a historical peak and sank as the 1990s stock bubble deflated. Other stock indexes went down too but the Nasdaq lost more because it was laden with internet-related stocks for which expectations had been wildly exuberant.

The companies in the Nasdaq were bid up until the index reached 5133 in March 2000. It is around 4275 as I write this, about %17 lower than the top 16 years ago—a measure of how extreme the technology bubble was.

Funny that the market for shares of technology businesses has some similarity to the 17th century Dutch market for tulip bulbs. The common element is novelty. Tulips were relatively new in Europe and there was great interest in producing flowers of novel colors and stripes. One could say that the bulbs were the internet stocks of the early 17th century.

The tulip bubble has been contested on various grounds—whether it was a real bubble, whether there was some rational explanation. But the price paid for a single bulb at the top –the value of a landed estate – and the bottom – the price of an onion – suggests an extreme event.

Certainly the psychological mechanism appears to be the same. In both cases, buyers in the grip of the craze resolutely ignored warnings that the glittering prospects might turn out to be a mirage. And of course the profits were real enough as long as enough investors kept faith and paid absurdly high prices.

You’d do fine if you got out before the collapse but most people did not. They could not abandon the money-making machine that had been so good to them. Their gains seemed to prove their investment acumen.

Short sellers play the luckless Cassandra role in stock booms. For the story of a short seller who correctly identified the 1990s bubble but could not make money from his prediction and resorted to fraud, see my 2014 book, Ponzi Regulation.

Today technology stocks don’t seem to be any more overvalued than other stocks. Indeed there are arguments that some of them are undervalued.

The Dutch tulip market eventually recovered and to this day the country is a major producer and exporter of flowers. From this historical experience, there is no reason to believe a worse fate awaits American technology.

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