March 06, 2015
Mark Cuban should know something about bubbles. After all, he became a billionaire in the 1990s stock bubble selling his start-up to Yahoo for what almost certainly was a grossly inflated price. But just as winning the lottery doesn’t make someone an expert on probabilities and statistics, hitting the jackpot once doesn’t mean someone knows much about bubbles.
Cuban demonstrated this point in a blogpost headlined, “Why This Tech Bubble is Worse than the Tech Bubble of 2000.” The gist of his argument is that the inflated stock prices of 2000 were in publicly traded companies. By contrast, many of the most inflated prices in the tech sector today are in companies that are still private. His remedy is for the Securities and Exchange Commission to make it easier for people to buy into these companies. It’s not clear which part is worse, Cuban’s diagnosis of the problem or the proposed solution.
On the former point, he misses the fact that the size of the bubbles are nowhere comparable. At its peak in 2000 the value of corporate stock was more than 30 times trend earnings, today it is closer to 20. The bubble was clearly moving the economy both by sending investment to its highest share of GDP since the 1970s and by causing a consumption boom through the wealth effect.
Neither story is close to being true today. If over-valued tech companies were to lose 95 percent of their value tomorrow, few people outside of Silicon Valley would notice.
This issue about these companies being privately traded makes between little and no sense. If Mark Zuckerberg paid $19 billion too much for Whatsapp, who cares? It’s a form of redistribution from the incredibly rich to the new superrich. That’s hardly a publicly policy problem.
Cuban’s real concern seems to be the small time operations being hawked through equity crowd funding. He’s worried that small time types will lose the $5,000 they put up to buy into hare-brained schemes that only make sense to those infected with ignorant greed. Cuban’s solution is to relax the restrictions imposed by the Security and Exchange Commission so that it will be easier to resell these shares to other suckers.
As a way for dealing with the problem of a bubble, this would be like relaxing margin requirements in 2000 so that it would be easier for investors to buy Internet stocks on credit. Cuban should have saved this one for the first of the month.
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