No. of Recommendations: 1
Found this today (which does hold truth):

Pyramids and Stock Prices

By (Frank Messina)
June 19, 2000

The coolness of the stock market in the first half of this year is certainly a stark and disappointing contrast to the blistering performance of a year ago. But should any reasonably intelligent investor, nay Fool, be surprised at all by this as the market deflated itself like an overcharged gas bag? Before you try to answer that, consider the indicators strewn along the investment road much like the Burma Shave signs of yore that went largely ignored.

First, the hucksters were out in force promoting interest in Internet startups and people were throwing money at anything with a dot-com after it. Next, as 1999 wore on, the overall strength of earnings reports of legitimate enterprises operating in a strong economy was a bell that was heard by many new investors. Finally, there were those tech companies on the brink of stardom as a result of breakthrough research and product developments that held the promise of mighty investor returns that only fueled the flames further. The multitudes responded to these calls with wallets in hand.

Don't get left behind! This train is pulling out and you better be on it, and the money flowed into companies like rivers of cash. Worse, for many it was done with money borrowed from brokers on margin accounts. And as the money flowed in, the stocks went higher, and more money flowed in, and the stocks went higher yet.

At this point, investordom crossed over the line of good sense and transformed the stock market at large into a giant pyramid. No, not the Egyptian kind, the inverted kind that is common in most get rich quick schemes, whose life and success is dependent on new participants being brought in to pay off those earlier entrants.

It's simple, you join by buying in. Then you go out and recruit 10 friends, and each one of them in turn goes out and recruits 10 friends, and because of the prospect of a huge payoff, each of them recruits 10 friends which creates layers in the pyramid and determines how and when you get paid. In a fairly short time though, recruitment gradually stops, payoffs cease, and the pyramid collapses onto itself.

Does any of this sound at all familiar yet? Stock prices were being artificially advanced last year by new "recruits." It had to end just as the previously described pyramid scheme would end because it lacked foundation. People were not buying into companies because they thought they were great long-term investments, but rather a fast, easy ride to the big payoff window.

Any Foolish investor knows that speculative price levels are not sustainable. Anything beyond that which can be supported by an outstanding business model, growth, sales, and profit is traveling the slippery slope and at a great risk of sudden decline. As in the Pyramid scheme, the early entrants benefit, everybody else gets punished by their own greed and stupidity, and neither Alan Greenspan nor the Federal Reserve had anything to do with it!!!

It is amazing and amusing to listen to the whining and sniveling from those who would seek to blame the Fed for any of this. The pullback was caused by investors who knew they were way too far out on the limb of a very, very tall tree. When the wind started to blow they ran for cover. Celera Genomics did not dive because of the Fed, nor did Qualcomm or any other company you want to name.

The fact of the matter is that Alan Greenspan has been one of the most effective shepherds of the U.S. economy this country has ever had. Business is good, people are working, productivity is strong, goods and services are being bought and paid for with cash, inflation is not on the radar screen -- and this in large measure due to the deft guidance of the Fed. Ask Jimmy Carter if he wouldn't have rather had Alan Greenspan on his watch.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.