Brian Jackson
I received the best kind of critical feedback to my post "Could tech stocks actually be undervalued?" – pointed, well-argued and respectful of the larger picture.
The post presented evidence from Mary Meeker's annual "State of the Internet" report to argue that the technology sector is undervalued. Quite reasonably, a reader from Richmond B.C. questioned the source: "I remember Mary Meeker, from the 1998-2001 tech boom and bust. If I remember right, she never said: "Maybe these stocks are overvalued."
I was employed by the research department of a global investment bank though the end of the tech bubble, and am well aware that the broker dealer industry did not cover itself in glory in the late 1990s.
I have no interest in providing excuses for the industry's avarice during the tech bubble. None. At the same time, my insider perspective informs my view of technology stocks now, and I'm still bullish on the sector for the long term.
In the late 1990s I learned a lot about the finance industry, and a lot about asset bubbles, which have been similar throughout market history.
I can say definitively that, by early 1999, technology and telecom analysts were well aware that the ballistic performance of their stocks, despite high valuation levels, was not going to last forever – they said so in private conversations. The problem was that they could not, with any degree of confidence, pinpoint when the party would end.
At the time, the banks' institutional sales and investment banking departments – the leaders of which were, in many cases, making a lot more money than the analysts – were always careful in phrasing their questions to analysts. They didn't say, "Do you think this is sustainable?" but instead, "Can you guarantee me that a huge correction will happen in the next three months." The honest answer to both questions was "no."
This, in my experience, is just a magnified example how the capital markets industry works. The career (and personal financial) risks of standing in front of the runaway gravy train are prohibitive. This holds for every sector where there's a lot of underwriting activity happening – not just technology stocks in the 1990s.
Placing the technology bubble in historical context is also important. For me, a comparison between the tech mania and the example of the U.K.'s railway bubble in the 1840s is instructive. If the modern technology sector follows the same pattern, it would be very bullish for investors in the sector.
According to a research paper by finance professors Gareth Campbell and John Turner from Queen's University in Belfast, railway stock prices doubled between 1843 and 1845 before cratering 67 per cent in the next five years. Much like technology stocks in the 1990s, over-optimism resulted in too much money being invested too quickly, and overcapacity led to widespread financial ruin.
Importantly, however, the end of the railway financial bubble did not stop the rail industry from proliferating in the years afterwards. The British Railway system more than doubled in size in the 20 years after the bubble collapsed, from 9.8 thousand kilometres in 1850 to 21.5 thousand kilometres by 1871, despite the apathy of investors still stinging from previous losses.
In the same way, technology has continued to expand into the economy in the wake of the tech bubble, and should continue to do so.
The context surrounding the finance industry excesses of the late 1990s, and the historical context of the technology bubble, permit and contribute to my bullish view on the technology sector, despite the understandably bad taste left in the mouths of investors in the markets in 2000.
Scott Barlow