When there has to be a sucker somewhere in the room, and you can’t figure out who it is…… it’s you.
Every market craze has its symbols and legends. The Internet bubble that peaked in 2000 gave us the Pets.com sock puppet. Enron Corp. once set up a fake trading room, with real people pretending they were doing trades, to impress a group of Wall Street analysts. Snapchat isn’t a public company, but at one time it had at least one well-known suitor that is.
Uh huh. And what is Facebook itself? Twitter? Groupon? Netflix? Or, for that matter (on a valuation perspective) Amazon?
It’s actually pretty easy to set up a business that is nominally “successful” — that is, one that manages to survive for a while. You simply need a seemingly-inexhaustible source of money.
So long as it lasts so do you.
Most people think this is simply a function of a bunch of venture funding folks ponying up in the hope of a big payoff. That, if it was what it was, would be ok. After all I’ve been there and done that; MCSNet started literally in my apartment closet with a stack of modems, a 56k leased line and a hand-built computer, all kept from melting down with a $20 box fan. There was a decent chance that the investment made in that nascent business was going to be flushed down the toilet; instead, it led to success.
But in this case it’s a bit different because what tends to happen is that these sorts of “trials” go on for a lot longer than you’d think, and a big part of the reason is people like you. That is, these “trials” wind up being conducted in the public markets; the firm undertakes an IPO, everyone cheers, we all think it’s great when the stock doubles (or in some cases goes up by a factor of 10 or more!) and then in many cases the company uses that “appreciated” stock as currency, buying up other things and perpetuating the cycle exactly as has occurred here.
So who’s the sucker? You are.
Why? Because you’re in the market and whether you buy the stock individually (perpetuating the myth that this “company” has a business model that returns a decent amount of earnings per actual share on a forward and durable basis) or in a mutual or index fund (which does the same) you are cheering a phantasm instead of an actual fact.
In many cases, like Amazon’s, this phantasm goes on for years — or even a decade. It becomes so popular and embedded in people’s minds that it takes on a life of its own, as has Netflix. The people who run the joint take on a folk hero sort of persona, even though they take their pay in “stock options” and “diversify” every year (that’s the story, natch) taking out millions — or hundreds of millions — of your money and stuffing it in their pockets.
Here’s a hint to the peanut gallery, from someone who ran a profitable business in the Internet era: The best rate of return is in your own company where you direct your future, you make the decisions, and thus you have a modicum of control over whether you succeed.
The truth is that diversification among executives is code for “I think I’m going to fuck up and so I’m going to take some (usually a whole bunch) of your money and stash it so that when I screw the pooch what’s lost is yours, but mine is largely protected.”
I bet your first thought on reading that is that I’m full of crap. I assure you, as a former Internet CEO who knew damn well that despite being pretty good what I did statistically it was certain that I would eventually stand at the plate and whiff at three balls before I connected on one — I’m not.
With the markets at or near “all-time” highs it’s very easy to get wound up in the hype machine and think that it’s all rainbows and love, and that’s the easy way out for the so-called “media” as well — especially those who are reliant on the hype and social meme for their very existence.
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