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.comment: Surprised by Poverty
It Wasn't As Good As It Looked
August 22, 2001
I received email over the weekend from a long-time friend who has fallen on hard times because his professional fate has been tied to the success of Linux. Last year he was doing very well. So, it seemed, was Linux.
Linux World, he suggested, is going to be a very somber place, even as Linux trade shows the last few years have been scenes of tremendous -- Alan Greenspan would have said irrational -- exuberance.
History demonstrates the accuracy of what some of us were saying last year and the year before: That things like the equities prices in the tech sector were based on ridiculous assumptions, and sooner or later someone was going to notice this, pronounce the emperor naked, and it would all come crashing down. Which it has done and to some extent continues to do.
It's very much like the story of the counterfeit money in Morocco. The way this story goes, Americans visiting that country on buying trips a few years ago would use a color copier to produce fairly large sums of counterfeit U.S. currency. It wasn't bad looking stuff, though it wouldn't make it undetected for very long in the U.S. But in more remote regions of a foreign land, it would pass for the real thing. It worked. It worked so well, in fact, that there are nice little local economies there that are based entirely on the phony cash. It's a decent portable store of wealth, for as long as everybody involved in the transactions has faith in it. Of course, if the whistle is blown the whole local economy will collapse and whoever is holding the "currency" at the time will be out of luck. In this particular situation, there's no reason to believe that the whistle will ever be blown. But that cannot be said of the American stock market.
It was inevitable that one day someone was going to say, "Hey. Aren't these companies we're investing in supposed to make money at some point, rather than lose huge amounts of money all the time, for as far into the future as can be seen?" And somebody else was going to say, "Once everyone who wants one has a computer, can we really expect people to blow a grand or more on a new one every single year?" Whereupon the unsettling noise of cracks forming in the flimsy foundation were heard. They broadened quickly. Some people escaped with their lives, while others were crushed.
A whole lot of money, much of which had existed only on paper, simply disappeared. Ceased to exist. People who were surprised by wealth were even more surprised by its departure. The smart ones didn't behave, when they were rich on paper, as if they were rich, and therefore do not now face huge debts they have no way to repay.
Unfortunately, many in the technology industry, and this includes companies as well as individuals, just sort of assumed that it would go on forever, despite the fact that this flew in the face of any brand of sense you can name except for nonsense.
�And It's Not As Bad As It Looks Now
When the whole stupid thing collapsed, it did so with a vengeance. Even those who are not familiar with finance are familiar with inertia, the tendency of a thing in motion to remain in motion. Set a brick on the ground and it will just sit there; drop it from 10 feet up and it will dig in, making a hole greater than would be justified otherwise by the weight of the brick and the consistency of the soil.
So it has been with the stock market, especially as applies to Linux companies. Let's look at some numbers.
At Friday's close, VA Linux shares could be purchased for $1.83. Last September, the same share would have cost you $63.64. In late 1999 it would have cost as much as $250!
Red Hat closed Friday selling at $3.86. Remember all the anger when developers had difficulty exercising their options to buy the stock at its IPO for, what, $12 or $14? It's been as much as $28 in the last year, and was in the $150 range as 1999 became 2000.
Caldera came late to the IPO party, so it topped out at about $30 soon after it went public in the spring of 2000. In the last year it's sold for $9, and on Friday you could get a share of it for -- get this -- 67 cents. A company that scuttles along the bottom like this for very long gets delisted -- becomes a "penny stock."
I propose that these low prices are as ridiculous as were the prices at their height. Call it "irrational despair" that has swept the market. It has as little reasoning behind it as did the insane heights to which share prices soared. Anybody who thinks that Caldera, as a company, is worth less than a buck a share is just cuckoo. But VA wasn't worth $250, either. When prices plunged, they didn't drop to and stop at the value of the companies, they kept going -- inertia.
These phenomena -- insanely high share prices and insanely low ones -- affect more than the specific companies' equities, for two reasons. When a sector is generally deemed to be a poor place to invest, people with money will either put it somewhere else or keep it in cash. This applies to venture capital that had been available to Linux startups back when people were believing their own P.R. and which, now that the same people don't believe the law of gravity, is no longer available. Besides that, much of that venture capital has disappeared through poorly chosen investments made when it was thought that any damn fool idea would make money: now, there's less money to go around. (And heaven help the bozo who bought VA at its height and then borrowed against it to buy more.) So even nonpublic Linux companies are hurting.
The situation sure is bleak, isn't it?