Apple, Dumb Money, & The New Economy
March 13th, 2000 

We live in interesting times. Investing online has become an extreme sport. You can bungie jump from the precipice of a ten-year chart of the Nasdaq! Even to those of us benefiting from the high tech ascent to the stars are feeling space sickness. When will it reach the apogee? The so-called new economy is violating all the rules, but surely, what goes up must come down?

The danger is what goes up too fast, crashes. A crash will hurt the average American investor. You know, the guy next door late to the tech party. The guy who just logged on yesterday. It's the little retail investors driving this market higher. The same people the big dogs on Wall Street like to call the "dumb money." Mr. and Mrs. Investor will push VeriSign above $300 in the next week. They're the dummies who think Rambus or Akamai or a host of other companies valued at a thousand times this year's earnings are long-term holds. Yeah, they're a long-term hold all right. Many of the high flying blue chip stocks of 1920's took decades to regain the air they lost in 1929-31.

There is no doubt that we are entering an era of productivity growth unprecedented in history and with it comes an era of prosperity for most of the world. The Internet is to the information age what the railroad was for the industrial. Unfortunately, every thinking person on the planet with a 401K investment plan has figured the same. The market, as they like to euphemistically say, is getting a little ahead of itself. Just because productivity will almost certainly surge ahead at 3 to 7% a year for the rest of our lives, doesn't mean that some Internet startup should score a market cap larger than Apple's on its first day of trading.

Even if the economy grows at an annual rate of 5% for the next decade, the Nasdaq, up about 180% in 12 months, is far out pacing the growth of even the fastest growing sectors. The Nasdaq is up 24% year to date. At this pace, the Nasdaq would bust 16,000 by year's end.

Even the investors nimble enough to get out of the way of a big crash won't have the same market to return to after the party is over. Big market crashes leave bad karma behind. People will blame Ameritrade, E*trade and Wall Street. There will be huge class action suits against those relentless hipsters on CNBC. Jim Crammer will be drummed out of the business. The Motley Fool domain will be bought by a clown school. You think day trading has a bad name now? Wait till after the crash of 2001, they'll be dragging them into the streets for that good old fashion American tradition - a lynching. I'll have to change my name and get a real job. Believe me, it will happen, but it won't be tomorrow. Thank goodness, because tomorrow I plan to rake in more dough trading ridiculously overpriced equity of highly questionable, almost fraudulent, value.

Look at Japan, the similarity between the situation on the Nikkei in 1990 and the Nasdaq in 2000 is absolutely disturbing. And why did the Nikkei collapse? Was there a war or a great depression? No, the still-yet-to-recover Nikkei died in October of 1990 because clueless central bankers were tightening the money supply and the economy began to slow. Grandpa Greenspan and the geriatrics on the Federal Reserve are hell-bent on slowing our economy before prosperity breaks out for the average Joe, who btw, has no stock portfolio much less a decent saving account. So far, all the Feds have succeeded in doing is to tank the interest-rate sensitive blue chip stocks on the Dow into a serious bear market, while encouraging the Nasdaq bacchanalia onward to new heights. After all, why would a corporation with little revenues, no earnings, 100 plus percent growth rate and a market cap of billions let a little detail like rising interest rates ruin the party?

OK, so I am hyperventilating as I write this. Shouldn't I be? What, do you think everything's peachy in the stock market? What's happening on Wall Street today is not business as usual. I should know, I haven't made a money losing trade since October, and that's not natural.

Every morning I fire up my trusty Macs, flip on CNBC, check the S&P futures, scan the Wall Street Journal, NY Times, and the newswires looking for profitable trading opportunities. There is always something percolating higher. There's always a latest buzzword, a hot rumor, a soaring sector, a strong upgrade, a new alliance or a technical breakout in the making. It's all about two strategies, buying momentum or buying on the dips and waiting for the momentum to rotate back around. Rambus is a good example of a recent mindless momentum play, while Adobe in the low $80 is a dipper waiting for that ten point come back day. Neither stock I would feel comfortable holding overnight.

A fund manager appearing on CNBC bemoaned the fact that no one is afraid of losing money in the stock market today, what investors now dread is missing out on the next big thing. I know the feeling. We all have plenty of opportunities to get rich quick in this stock market and most of us miss them. Even in the greatest bull market in the history of the world, money tends to flow from the weak to the strong, from the dumb to the informed. Of course, some jerks are just lucky. As famous golfer Gary Player once told Donald Trump, "The harder I work, the luckier I get."

The most aggressive, most speculative, most brazenly risky investment strategy has turned out to be the most profitable.

I often get e-mail from someone inspired to try his or her hand at investing. Often I'm asked something like, "Dear Mr. George, I would like to buy some stock in Apple. Who should I contact?" Such questions make me cringe. Where do I start? Questions like that make me feel like a battle weary sergeant handed green recruits to replace the dead and the wounded. I try to explain to newbies that this isn't a particularly good time to be a new investor in high tech stocks. Yeah, right.

I worry that this bull market has become the centerpiece of our culture, that the historically blind mass media lends the soaring Nasdaq a false sense of normalcy, of inevitability. As if it's our pre-ordained destiny to be rich - it's just going to happen.

There was a self-help TV documentary on PBS this weekend called, "The Courage to Be Rich." It's about the difficulties of being wealthy. Hello, that's gotta be a sign of a bull top. I worry that new investors may not understand that what is going on today is an anomaly of such magnitude that Wall Street insiders are really worried. I worry, while I climb a wall of worry to greater and greater capital gains, that my profits are no longer proportional to the amount of effort and risk expended. Maybe that's why I have this sinking feeling that we are at the beginning of the end rather than the end of the beginning.

As the Nasdaq climbs ever higher, sometimes I have to sit back and ask myself do I really have the cajones (courage) to be a player in this market?

But what can I say? Keep your money under the mattress? More than likely, Nasdaq 6,000 is only a few months away. Heck, why not Nasdaq 10,000? It's a party. Parties don't last forever, but that isn't really a good reason to go home early, is it? Have fun while it last; I feel the makings of one heck of a hangover.

Your comments are welcomed.