High-Tech Issues Defy Gravity, For Now

In the late 1920s, stock speculation had become a national pastime, penetrating both the high salons and the low saloons.

Stock market talk ceased to be considered unfeminine. Brokerage houses created separate rooms where women could watch the ticker tape without being distracted by men.

The market was doing very well. The Standard Statistics index of common stock prices doubled in the two years between September 1927 and September 1929.

“You could talk about Prohibition, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.”

That’s how John Brooks, in “Once in Golconda,” recounted the remarks of a British correspondent newly arrived in the New York of 1929. (Golconda, now in ruins, was a city in southeastern India where, according to legend, everyone who passed through got rich.) “It is perfectly well recognized by `insiders,”’ the Journal of Commerce observed late in 1928, “that a market of the kind that has been going on cannot last indefinitely but must undergo a readjustment.”

And then, readjustment.

Seventy years ago this week - on Black Thursday, Oct. 24, 1929 - the market took a huge nose dive. The next day, President Herbert Hoover offered the nation his famous diagnosis: “The fundamental business of the country is on a sound and prosperous basis.”

On Tuesday, Oct. 29, the big crash came. It was the most devastating day in the history of the stock market.

The frenzied selling went on for two weeks, until the value of the stocks on the Wall Street Exchange had declined about 40 percent. In the three years between September 1929 and September 1932, General Electric stock dropped from $396 to $8, and RCA from $101 to $2. The crash was followed by the worst depression in U. S. history.

By late 1932, one in every five persons in the labor force, or about one of every seven adults, was out of a job. In three years, the entire American economy ran steadily downhill at a quickening and disastrous pace.

We have again become a nation of stock traders.

Excluding technology stocks, valuations seem to stay within a reasonable range. It is, however, the spectacular rise of technology stocks in general, and Internet companies in particular, combined with their unprecedented price volatility, that whetted the appetites of many new investors and transformed housewives into daily stock traders.

The Internet boom has created unimaginable wealth for thousands of investors and entrepreneurs (often paper wealth, at least for the time being). It also infected millions of us with the get-rich-quickly syndrome.

Even some venture capitalists, however - people who try to make money by funding new companies - and do well when these companies fly high - admit many of the Internet companies are probably overvalued. Red Herring, a respected Internet industry publication, reports that to justify their current stock prices, high-techn companies that went public in the last four years would have to see revenues grow more than 80 percent every year for the next five years. In other words, they will have to do better than Microsoft and Dell did during their first five years.

“Internet stocks trade at prices that anticipate sales and earnings growth unparalleled in financial history,” says Anthony Perkins in Red Herring. So what, one may argue, if there are no parallels in financial history? Since the Internet itself constitutes a revolution, a search for parallels is flawed at the outset. Since the Internet so profoundly changes the way we produce, consume, communicate and play, past patterns don’t apply.

Skeptics, on the other hand, maintain that the Internet does not defy the laws of physics and probability. While some Internet stars may in fact do better than Microsoft and Dell did in their adolescence, some are likely to fail, and others will do just OK.

If that happens, there’ll be a lot of wreckage, losses and investor pain. Summing up the America he saw 70 years ago, British correspondent Claude Cockburn denied that what he found reflected excessive materialism.

What he found was “a brief enactment of what was essentially an old American dream. If the attitude of Americans to the stock market boom proved anything, it proved that they believed in miracles, that if you try hard enough you can make wonderful things happen.”

October has a bad reputation in the history of the stock market. We should be glad it is about to end. But let’s remember what Mark Twain said in “Pudd’nhead Wilson”: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”