[Chapter 823: Blowing Bubbles, Blowing Big Bubbles]
In the early '90s, traditional industries were sluggish, and the stock market wasn't exactly enthusiastic about them either. The value of a stock was generally understood as the company's future cash flow.
If you earned $200,000 in a year, and earnings per share were $2, then, for a ten-times valuation, that stock would be worth $20. But if those earnings weren't guaranteed to stay constant, investing would be pointless. If the price-to-earnings (PE) ratio was below ten, you could buy because it was better than bank interest rates. However, if it went above twenty, it became risky due to uncertainty.
For ordinary industries, you could estimate using PE, but it wasn't the same for high tech. Take Cisco, for example; its revenue was rapidly expanding. One month it was $2, the next it was $2.50.
Here, the valuation got tricky. The current stock price was $40, and a 20 times PE ratio did seem high. However, with earnings booming, it could be up to $3 by year-end. But what about next year, or the year after? Since you were investing in the future, a 20 times PE was naturally inappropriate.
If it were just Cisco, Wall Street wouldn't care. That stock would likely be relisted the following year. The current valuation wasn't something they needed to worry about.
The problem was that many of these tech stocks on NASDAQ had significant PE premiums. Companies like Microsoft and Oracle were well above a 30 times valuation. Generally speaking, if valuations were too high, major shareholders could use it as an opportunity to sell. But William White, for some reason, seemed to forget he had those stocks.
When a major shareholder didn't sell off much, investors were naturally happy. They didn't mind; if worse came to worst, they could always just mortgage their positions.
While some were pleased, others were not. If no one was selling, market activity diminished. Before long, delisting could be on the horizon. The rules in the U.S. were quite strict about the liquidity of stocks, and having too few floating shares wasn't allowed.
Thus, if you wanted to control a stock in the U.S., it was difficult. It simply wasn't possible unless you owned a majority.
This phenomenon had been prevalent in the 1940s and 50s, similar in some ways to the Chinese stock market, where various tactics were used to spin stories. Why did it vanish later? Because all the naive investors got wiped out, and no one wanted to deal in the stock market anymore. Everyone believed they were just dealing with a bunch of con artists rather than investing in real companies.
The Great Depression in U.S. history was triggered by Wall Street's excesses. As scams ran wild, eventually, no one dared to invest anymore, decimating the middle class.
When Americans realized this was not the way to go, they implemented some of the strictest laws in the world. The Securities Fraud Law was fierce. Under it, if you were guilty, you had to prove your innocence. This was different from other laws--if you stole something, everyone knew it was you, and if the prosecution couldn't provide solid evidence, you wouldn't be punished.
The Securities Fraud Law was not similar; if you couldn't find evidence to prove yourself innocent, you were deemed guilty, and all earnings were seized plus hefty fines that could bankroll you into bankruptcy.
"Sir, the three major ratings agencies believe NASDAQ is overvalued. If this keeps up, it's bound to create problems," Filson said.
"Ugh, these old-timers are a riot. Do they really think they'll be able to scoop up cheap shares?" William sighed, a wry smile on his face.
"Er, boss, aside from these new toys, all other industries are struggling," Filson added with a bitter smile, paying no mind to the ratings agencies' drivel.
"Filson, these old guys are losing it. Do they think they can fool the naive investors? It's utterly ridiculous. Is value investing dead?" William said, attempting to sound nonchalant, although internally, he was quite displeased.
The so-called bubble was completely insignificant. Even by 2000, talking about the internet bubble would still be debatable. Looking back, it appeared more like an extreme shake-out.
Greenspan mentioned a bubble as early as '96. Had anyone listened to him, they would have missed out on the entire internet boom.
Clearly, the European friends fell victim to this. They kept saying, "Investing in the stock market is risky," and that was precisely what they did. Three years later, they realized clearly they'd been conned. Just when they charged in without a care, bam--the internet bubble burst.
It was ironic; back in '96, when Greenspan spoke about the internet bubble, it felt like a joke. By '99, he declared that the U.S. economy had successfully transitioned, saying they had escaped from previous growth models.
It was funny how when the European counterparts finally took the plunge, the likes of Buffett and Greenspan began preaching value investing. They even threw in critiques directed at greedy investors.
As for the investment banks fanning the flames, they intended to issue a slap on the wrist. When things went south, they ended up imposing fines of a few million, which barely scratched the surface. NASDAQ had lost five trillion dollars and a few million in fines was hardly a penalty.
The Germans had the worst luck, though. They traditionally didn't dabble in the stock market but still got caught up in this internet bubble.
"By the way, Filson, what's up with Buffett? Has his investment portfolio changed at all?"
"Not at all. The old-timer has a good eye. He's been talking about American values a lot recently, and he was quite dismissive of manufacturing outsourcing."
"What a character! His insight is indeed remarkable. It's a pity if he truly believes what he says, he should invest in General Electric."
"True, his portfolio is heavily weighted towards insurance and finance."
"Huh, what someone says isn't as important as what they actually do," William scoffed. He recalled the adage about accounts telling no lies.
As for Greenspan, William couldn't be bothered with him. He didn't speak for himself; after all, his predecessor had ignored advice. Now, the best he could do was teach.
Professors in the U.S. might enjoy high stature, but they couldn't compare to the head of the Federal Reserve.
But if they enjoyed their game, so be it. William certainly wouldn't jump in to stir things up.
Stocks had been around for years, and the way to make a profit remained unchanged. It always came down to buying low and selling high. The only change was how one might execute that strategy.
"Ugh, being a big shark must be nice. There are just too many resources to tap into."
"Sir, we've recently reduced our investments, and now they're using it as a talking point. I think they're eager for us to sell down," Filson reported.
"Well, having connections certainly makes things easier, but they're dreaming if they think that. Even with a bubble, what's the harm? Moderate overvaluation makes for a healthy market. But, Filson, we still need to keep an eye on those guys. If the three major ratings agencies are kicking up dust, they might be planning something big."
"Understood, boss."
In fact, William himself was one of them. While pointing fingers at others for their greed, he seemed to forget that he might be the greediest of all.
That was why the American approach seemed so irritable. Why couldn't everyone prosper together? "Seriously, how could you not scam a little? Would it kill you?"
*****
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