The Brewing Crisis

Bubbles should not only be viewed as an economic phenomena, it should also be viewed as a social phenomenon. From the prospect of history, almost every bubble is accompanied with a peculiar trend of thought of the society. The dot com bubble is typically such a kind of bubble.

The human civilization has experienced five thousand years of agricultural civilization era, and experienced three hundred years of industrial civilization era. People will naturally think that the pace of the civilization is accelerated. On the occasion of the new millennium, the whole world is wishing a glorious future.

 

In 1994, the appearance of World Wide Web browser and Mosaic makes the Internet began to attract the attention of the public. In 1996, most of the listed companies in the United States own a public web site as necessities. People began to notice that the Internet can deliver information freely and are accessible to worldwide information as well as some other wonderful characteristics. These concepts attracted a lot of young people. They think the internet-based new business model will rise and they expect to become the first to earn money. Internet can lower the cost to contact with customer all over the world. Traditional business model has been greatly changed in the new form of advertising, selling and customer relationship managing. The Internet has brought a new business model which is still not possible several years ago. This, will of course draw the attention of venture capital.

The foundation of the development of the internet is not core technics, it is even not the capital, but the user. Once the users of internet get to know about the internet and be used to it, he can never live without it. From the prospect of economics, capital market is not isolated but an internal recycle system, like metabolism. The capital inflow to the internet business will outflow back to the to the capital market in the form of consumption of individuals. This means the investment of internet business is after all from each of the individuals which use the internet. As the old saying goes: Many a little makes a mickle. The source of wealth of internet business seems very steady and considerable. All these make the business about internet very attractive.

For investors, no dream is bigger and more realistic. At this very moment, in the stock market, www is like a Pandora’s Box. Releasing hope, but finally, as well as woe. In the next blog, let’s look into details about the formation of the bubble!

 

Introduction: The Research of Dot Com Bubble

Financial market is inherently instable but financial market has a learning mechanism. Forms of bubbles in the history are various but there is something invariant underlying these bubbles. And the thing is humanity. When moral hazard and adverse selection increased, things will go wrong. And one of the forms of it is a bubble.

 

It is not easy to define bubble as Peter Garber ever said that that bubble is “a fuzzy word filled with import but any operational definition.” Many economists tried to give a definition of bubble. Charles Kindleberger ever defined it as “a bubble is an upward price movement over an extended range that then implodes (Manias, Crashes and Panics).” “Bubbles are typically associated with dramatic asset price increases, followed by a collapse (Brunnermeier 2007)”. Among them, I like Peter Garber’s definition most (several economist defined it in this way like Mishkin and Eakins (2006)). He said that a bubble can be viewed as “a price movement that is inexplicable based on fundamentals.” I like it because it mentioned fundamentals. And fundamental is a concept valued by value investors and should be kept in mind by every investors.

 

Each of the bubble in the history is with lots of stories. Holland’s Tulip Mania can be traced back to 17^th but before that, such things did happened. The Mississippi bubble of 1720s had a profound effect. John Law, a superb gambler, whose financial theory has inspired generations of economists. Newton signed that “I can calculate the motions of heavenly bodies, but not the madness of people” after a failed investment in the South Sea bubble. Railway mania in 1840s and dot com bubble in the beginning of the C21th are brought by the new technology. Stock price bubbles and housing bobbles have taken place and are taking place in different places in the world under different circumstances.

 

 Each time I read again The intelligent investor, I couldn’t help thinking “What valuable comment Graham will give after the dot com bubble if this generous man is still alive?” This definitely motivated me to research into details about the dot com bubble. In my bog, I will explore what causes the dot com bubble combined with

the former research results. I will also explore what is the similarity of dot com bubble compared with other bubbles and what is the distinct place of it compared with others. At the end of the series of blogs, I will try to give some ideas with this bubble in Graham’s way and try to see if we can learn more from this bubble.

Reference:

 

Kindleberger, Charles P., and Robert Z. Aliber. Manias, panics and crashes: a history of financial crises. Palgrave Macmillan, 2011.

 

Mishkin, Frederic S., and Stanley G. Eakins. Financial markets and institutions. Pearson Education India, 2006.

 

Durlauf, Steven N., and Lawrence Blume, eds. "The new Palgrave dictionary of economics." (2008).

 

Garber, Peter M. "Famous first bubbles: the fundamentals of early mania." (2000).