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Link: archives: June 2011 Link: archives: May 2011 Link: archives: April 2011 Link: archives: March 2011 Link: archives: February 2011 Link: archives: January 2011 Link: archives: December 2010 Link: archives: November 2010 Link: archives: October 2010 Link: archives: September 2010 Link: archives: August 2010 Link: archives: July 2010 Link: archives: June 2010 Link: archives: May 2010 Link: archives: April 2010 Link: archives: March 2010 Link: archives: January 2010 Link: archives: June 2007 Link: index: ben's blog Link: prev: Lytro and the Magic Camera Link: canonical Link: shortlink Link: openid.server Link: openid.delegate Skip to content, navigation or search Ben's Blog There's no sense in being precise when you don't even know what you're talking about. - John Von Neumann -------------------------------------------------------------------------------------------------------- 06.26.11 // The Incredible Sinking Bubble (Debating the Tech Bubble with Steve Blank: Part III) * Tweet * * IFrame This post originally appeared as my closing argument in our debate in The Economist. Technology stocks currently trade at an all time low vs. industrial stocks based on forward P/E ratios. Nonetheless, the esteemed and brilliant Mr. Blank argues that we are in a technology bubble. When I pointed this out, Mr. Blank modified his argument to say that the bubble would only be seen in the new companies. This is odd, because in the previous technology bubble of 1999-2000, the veteran companies such as Cisco, Sun, and Oracle experienced meteoric rises in their share prices. Nonetheless, let's look at the prices of the new technology IPOs that Mr. Blank highlights in his argument: * LinkedIn-Mr. Blank's poster child harbinger of the bubble is down 30% since Mr. Blank quoted its stock price. * Pandora-Is down 17% since its IPO. * RenRen and YouKu-The Chinese Internet companies that Mr. Blank referenced are down more than 50% and 25% respectively. So, this is a technology IPO bubble in which all of the bubble companies are going down in price. Perhaps we should rename it the Incredible Sinking Bubble. Of course, Mr. Blank's primary argument is not logical, but rather, it's psychological. He unspools a captivating theory with four psychological phases: stealth, awareness, mania, and blow off. He follows that up with a personification of investor categories: Smart Money, Shills, Marks, and True Believers designed to create empathy for the poor victims of the technology bubble and portray the others as sophisticated con men poised to take advantage of "your neighbors, parents, or grandparents." I find these arguments to be most appropriate, because bubbles are not logical. They are, in fact, psychological. Specifically, before a market can enter a bubble, the bubble psychological precondition must be met. The precondition is the same for all bubbles: the overwhelming majority of the population must believe that prices will continue to go up. In essence, in the great balance of fear and greed, there must be overwhelming greed and a vacuum of fear. Otherwise, prices will remain logical and no bubble will emerge. Has the psychological precondition been met for the great technology bubble of 2011? It turns out that there is plenty of fear in today's financial markets in general and in the technology market in particular. Stocks are at their lowest point in two decades and technology stocks are at an all time low vs. industrials. I imagine the readers of the Economist are leading thinkers on these matters whose advice and inclinations will likely be followed by the larger population. As of this writing, 68% of the people who voted in this debate believe that we are already in a bubble. If 68% of Economist readers and their followers do not believe that prices will rise indefinitely, then it stands to reason that prices won't rise and, low and behold, they haven't. We should not be surprised by the Incredible Sinking Bubble, because it's not really a bubble at all. In fact, it's just the opposite: the balance has swung so far to the fear side that people believe we're in a bubble even though we are in a boom. * Tweet * * IFrame << Previous entry * Follow Ben on Twitter * Subscribe * About * Archives Visit a16z.com >> Top Posts * Home * Microsoft Buys Skype * Why We Prefer Founding CEOs * When Smart People are Bad Employees * How Andreessen Horowitz Evaluates CEOs * How to Minimize Politics in Your Company * What's The Most Difficult CEO Skill? Managing Your Own Psychology * Taking the Mystery out of Scaling a Company * Peacetime CEO/Wartime CEO * Four Things Some VCs Do That I Don't Like * Why Startups Should Train Their People * Ron Conway Explained Recent Posts * The Incredible Sinking Bubble (Debating the Tech Bubble with Steve Blank: Part III) * Lytro and the Magic Camera * Debating the Tech Bubble with Steve Blank: Part II * Debating the Tech Bubble with Steve Blank: Part I * Laying the Groundwork for a Global Startup * Debating the Bubble with Steve Blank * ShoeDazzle * John's New Blog * Microsoft Buys Skype * The CEO's CEO * Peacetime CEO/Wartime CEO * Andreessen Horowitz has a new $200mm Co-Investment Fund * What's The Most Difficult CEO Skill? Managing Your Own Psychology * Bubble Trouble? 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