
Inflated Tech Valuations Bloat The Entire Economy - dmbaggett
http://www.forbes.com/sites/rogerkay/2014/04/22/inflated-tech-valuations-bloat-the-entire-economy/
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ChuckMcM
Heh, when ever I read these I think "So why do they care?"

It reads as yet another "I don't understand so it must be {wrong | criminal |
crazy | bad | what-have-you }" kind of rant. Fair enough, but focus on the
'don't get it' part not the conclusion based on non-understanding part.

If company A's stock is 100x over valued, and they buy Company B with it for
100x more than Company B is "worth" has that changed anything really?

In the dot com bubble there was a serious problem, individual retail investors
who had no idea how to value a company were buying stock in those companies at
what ever price the market set. The market kept raising the price and the
retail investors kept pouring in money. A seriously large transfer of wealth
from people who didn't understand to people who took advantage of that. Once
they were no longer willing to do that, poof the market makers took their
money out and left. Boom!

As long as the folks doing the buying and selling are using their own money,
why should anyone get upset if they are "over paying" ? When people ask me if
they should invest in tech companies I tell them no. They should invest in
index funds, they are low load, maximally diverse, and resilient. So
billionaires are out competing with each other to buy companies, sit back,
grab a bowl of popcorn and watch the show. But why get emotional over it?

~~~
JonFish85
I'm not in finance, so this is just my uninformed opinion.

I imagine it's at least partially because this _does_ affect everyday people,
even if they're not directly investing their own money. People's 401ks &
pension funds are likely wrapped up in these (at least partially). Even if you
have an index fund, say tracking the NASDAQ, these huge valuations are
propping it up (in the FB case).

And as long as the valuations stay high, things are great. But if/when it
declines and suddenly money evaporates, it can really hurt if you're depending
on it for retirement / college / whatever. Even the indirect parts of it.

~~~
ChuckMcM
The point of index funds is they change their composition when things go
south, the S&P 500 index went from 447 in the early 90s to over 1800 today. If
you're investing $50/month in that you did quite well.

~~~
bcbrown
Is there a way to invest $50/month in an index fund? All the brokerages I
checked charge $5-10 per transaction, making it prohibitively expensive to set
up a recurring transaction at such a small amount.

~~~
ChuckMcM
Do you have an existing brokerage account or were you trying to set up an
account just for that? When I left Sun I rolled my 401K over into a self
managed IRA and my broker doesn't charge me anything to add money to it.

~~~
bcbrown
I don't have an IRA, and my funds invested in the stock market are under 10k.
I set up an account with Ameritrade, and every so often put another $1000 in,
so that the $10 cost is a smaller percentage.

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jonas21
Funny that the author uses the YouTube acquisition as an example of one that
"justifies a high valuation by eventually paying out".

Back in 2006, it was a company with very little revenue that was under threat
of being sued out of existence by copyright holders -- arguably a worse place
to be than a lot of the more recent acquisitions he's taking issue with.

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scotty79
> Newsweek describes all the things Facebook could have bought with that money
> other than a messaging platform. Things like a passel of double-decker
> Airbus A380s, an aircraft carrier, or vaccinations for every child in the
> world.

You don't know how much 12bln$ worth of Facebook stock is worth until you try
to sell it.

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buckbova
>There’s no way Oculus VR is worth anything like the $2 billion that Facebook
is offering for it. The company has no revenue, no product on the market, and
an unproven technology.

Many keep repeating "there is no bubble", but it is hard for me to believe.
The party has to end sometime.

~~~
pachydermic
Oculus does have a real, physical, available product - I've used one
personally that my friend bought (albeit through the kickstarter page). There
are definitely people who are interested and it actually worked relatively
well. Maybe it won't catch on, but I don't think it's absurd like many other
tech start ups.

Plus, they weren't bought for $2 billion. They were bought for $400 million in
cash and the $1.6 billion in FB stock which is quite a different thing. If you
believe that FB is overpriced, then they were really bought for a lot less
than $2 billion.

~~~
wcummings
What does the product being physical have to do with its value?

~~~
HCIdivision17
Having a functioning prototype that is good enough to sell is a massive hedge
against failure. Even if the company flops, the tech is going to be worth
_something_ substantial. This is in contrast to a device that exists on paper
only: concepts are useful, and engineering has value, but without an physical
device there are a lot of reality checks left.

It's the hardware equivalent of ideas are cheap, but implementations are where
real value lies.

~~~
wcummings
You can have a functioning prototype of a intangible good (software), this
also requires engineering effort and holds tangible value.

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Zigurd
That was an astoundingly bad article, even for a pop-business publication.
There are a lot of things going wrong with the economy but a danger of tech
valuations igniting inflation, apart from Bay Area housing, is not one of
them.

~~~
venomsnake
Very Serious People need to find another way to threaten us with
hyperinflation after their warnings for the last 5-ish years failed miserably.

So they take a real issue - a (very) plausible .com 2.0 in the works and spin
it to their favorite topic.

Potential tech crash won't be good for the economy at all, but it will inflict
damage by other mechanisms.

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alanlewis
Mark Andreesson, Chris Dixon, and Benedict Evans discuss tech valuations on
the most recent A16Z podcast: [http://a16z.com/2014/04/21/a16z-podcast-
evaluating-valuation...](http://a16z.com/2014/04/21/a16z-podcast-evaluating-
valuations/)

(Spoiler alert - none of them think there is a tech bubble, at least not
broadly)

~~~
general_failure
It's in their best interest to say that this is not a tech bubble. Just
saying.

------
Eliezer
The opening comments about the Federal Reserve trying to inflate US debt out
of existence caused me to stop reading, as it was immediately obvious that the
author didn't understand economics.

~~~
fsk
In a paper monetary system, you can have unlimited national debt. It's just a
number. The US Federal Government is the issuer for dollars, and its debt is
denominated in dollars. So, they can always print more money/bonds to
refinance the debt. (Unlike Euro countries, where their debt is in Euros but
no single country controls the Euro.)

When their is inflation, existing debt is worth less, because it can be repaid
with inflated dollars.

Right now, the Fed Funds Rate is 0.25%, while real inflation is much higher
than that. (The CPI is a lie.) That creates a perverse incentive, where (due
to the financialization of the economy), it's profitable to load up on debt,
buy tangible assets, then wait for inflation and repay the debt with inflated
money.

There is no limit to the amount of the US Federal government debt. There is a
risk that Congress could refuse to raise the debt ceiling. More national debt
causes more inflation. If inflation is too high, there is the risk of a
hyperinflation collapse of the monetary system. Until that point is reached,
there is no limit to the national debt.

~~~
pessimizer
Unless you have some evidence that CPI is a lie, it's important to mention
that the idea that increasing the money supply must lead to inflation is
completely counterfactual. We have massively increased the money supply.
Inflation is still too low, rather than too high.

[http://www.tradingeconomics.com/united-states/inflation-
cpi](http://www.tradingeconomics.com/united-states/inflation-cpi)

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poopsintub
The author doesn't understand much imo. He compares a hotel chain with a
limited number of properties, hotels, and exponential growth, to airbnb, which
can blast past the number of booked nights of said old hotel in as little as a
few months or years. The valuation is very high because it has proven it has
the ability to take on the whole industry, not just one chain.

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jdkuepper
Let's look at it another way.

You own a company that's trading with a P/E of 100x. Investors expect a lofty
growth rate to justify that multiple and organic growth only lasts for so long
as a market leader. In finance, price-earnings to growth ("PEG") ratios tend
to be 1.0 at fair value, meaning a 100x P/E means investor expect 100% annual
growth. Your high valuation makes acquisitions easier (assuming your
overvalued now, you are buying assets at a discount). And, those acquisitions
are perhaps the only way to achieve/maintain those lofty growth rates over the
long-term. So, what's stopping you from making those acquisitions when others
are in the same boat?

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RV86
Inflated Tech valuations are the least of our economy's problems. This article
is riding the wave of anti-tech sentiment in an otherwise stagnant, slow-to-
recover economy. It's click-baiting and we're all reinforcing this sort of
thing by being agitated by it/drawn to it.

Add up all the "bloated" Tech Valuations and you don't get anywhere close to
the 1 Trillion+ we're looking at in outstanding student loans and the effects
the bubble bursting might have on creditors and debtors alike.

I'd enumerate other much more dangerous threats to our economy, but I just
read on Secret that someone is about to acquire my company for 5B.

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leccine
How about bashing the bing banks fueled real-estate boom instead?

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nutjob123
This guy is just showing off his ignorance. Really no analysis went into this
piece.

~~~
ryen
Sure, its mostly opinion. But the paragraph starting with "Facebook’s two-year
chart shows that..." has substance.

