

Is the tech bubble about to burst? - lowglow
http://pitchandpixel.com/2010/11/is-the-tech-bubble-about-to-burst/

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nostrademons
Insider selling itself isn't a warning sign that the company is overvalued.
Many directors and execs get a large portion of their compensation as stock
grants, and they have to sell to fund their lifestyles. Heck, many tech CEOs
take $1 salaries - you don't actually think they live on $1/year, right?

Insider _buying_ is almost always a sign that the company is undervalued in
the market. People inside the company are usually overweight on their
employer's stock, because they receive it as compensation and usually will get
enough of it that it's by far their biggest holding. If they want _more_ of
it, despite the risks to diversification that this entails, they must have a
pretty good reason to believe that the company is doing better than the Street
thinks it is.

~~~
kenjackson
_Insider buying is almost always a sign that the company is undervalued in the
market._

Do you have data to back this up? I ask because the standard wisdom was that
stock buybacks were a sign that the stock was undervalued. But it turns out,
looking at historical data, that it was no better predictor of the stock price
in the future than random chance.

~~~
paolomaffei
You're probably talking about COMPANIES buying back their stock, not directors
or founders.

Of course companies act for the well being of the company itself, while
directors only for theirs, so yeah, insider buying by a company or a director
is totally different.

~~~
kenjackson
I get that their different, but does the data back up insider buying
translates to undervalued stock? I used stock buybacks as an example where
people used similar logic to justify a stock being undervalued, but the data
didn't bear it out.

My question is does the data bear it out (presumably the data exists) or is it
just an assumption based on the idea that insiders _should_ have a pretty good
idea of the value of the company.

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dandelany
Some data here:

[http://books.google.com/books?id=iYuh-gfnwb0C&pg=PA361&#...</a><p>Basically,
it seems that extreme insider buying is a very good sign for the market as a
whole, but it's fairly rare. (31.7% returns in one three month period w/
insider buying signal, vs. avg. 4.2% returns in 75 3-month periods w/ insider
selling signal)<p>In terms of individual stocks, it seems that the predictive
power of insider buying as a metric is best when mixed with taking into
account the company's dividend yield, and they claim that this gives you a
6.2% edge.

~~~
kenjackson
That's good to know. I should set something up so that when I do detect
insider buying, I go hugely in on the S&P500.

For individual stocks the difference is too small for me to feel comfortable.

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scott_s
_That’s a total of $9,593,678,790 or 9.6 billion dollars moving out of the
tech industry, by people who have intimate knowledge about the future of their
companies._

How is that money moving _out_ of the tech industry? Those shares of stock did
not disappear when sold; someone else now owns shares of that company. Money
changed hands in exchange for stock. That money did not leave the tech
industry.

~~~
nostromo
I agree. In some cases, like Bill Gates, the money is probably on a one-way
trip to Africa. But in many cases the money will probably be used to fund new
tech ventures.

~~~
netcan
I don't think that's what scott_s meant. When Bill Gates sells his shares,
someone else buys them. The amount of money Bill withdraws is exactly matched
by a new investor(s). The MS stock price stays roughly the same.

Think of it this way, Microsoft didn't raid its savings account and sell off
office furniture to pay him. Another investor pays him.

~~~
scott_s
You are correct, that's the point I was trying to make.

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philiphodgen
Capital gains taxes rise in 2011. That might be a factor that the author
should consider.

~~~
gojomo
And there's a special one-time gains-tax-exclusion for small-business
investments before the end of this year -- so a good time to reallocate into
startups.

~~~
rdl
I really want to see a top tax attorney analyze this law and how it applies to
founders and angels for tech companies.

Specifically, I think the Small Business Jobs Act of 2010 can be used by
founders to buy founder shares at a trivial basis in one or more corporations
founded in q4 2010, built into businesses over the following 5+ years
(possibly in parallel...maybe you work on one full time every day, and let a
few sit idle with minimal involvement until later...). Then, provided the
business capitalization is less than 50mm at exit, and your ownership is 10mm
or less, you have zero federal capital gains or AMT liability -- I.e. You win
at taxes.

~~~
gojomo
I've been wondering much the same thing; so I asked this question on Quora:

[http://www.quora.com/What-pitfalls-should-be-avoided-if-
inve...](http://www.quora.com/What-pitfalls-should-be-avoided-if-investing-in-
a-small-startup-before-January-1-2011-to-take-advantage-of-the-
special-100-tax-exclusion-of-the-recently-passed-SJBCA)

IANAL, but it seems any business so formed must be active in some ongoing non-
services business. Still, I'm tempted to form a number of small corporations
for each of my 'backburner' ideas, make a small investment, then hire
occasional contractors to flesh out the ideas through R&D until they (or a
closely-related idea) seems ripe -- perhaps years from now. Then, I'd devote
myself full-time to it, and my founders' equity appreciation would remain
subject to this one-time 2010 gain exclusion.

~~~
rdl
Yeah, I'm probably doing the same thing :)

Question is: should you just do stupid-cheap WY/NV/etc. formations and then
redomicile, or do the real $5-10k corps with full paperwork, agreements, etc.?
Or would a top-tier firm/lawyer be willing to discount one principal/owner and
10 corps formed on the same day, in exchange for future business when those
corps get used more actively, take subsequent investment, etc.?

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rblion
If there is, it'll just wipe out the half-tries and challenge this generation
to evolve or die.

It's not that bad though. People are dependent on technology that keeps
getting smarter, faster, and simpler. Who is stopping any of us from spotting
large unsolved problems and presenting our solution in product form? JUST DO
IT.

We really are living in the best of times and the worst of times...

It feels like Facebook is constricting the unwary masses into a black hole
that consumes their time and data. How can we compete for marketshare? Apple
has come from almost dead to number 1 in a decade. They used to be hard to
hate, now the fanboys are being seduced by the magic of Big Google. Big Google
is doing everything for everyone all for free or very cheap, who could resist?
It's the same approach that made Bill Gates the world's richest man. It'll
probably work and Larry and Sergey can be the founding fathers of the
singularity along with that Ray dude.

So...that's leaves us students and hackers alike to try to either come up with
a new paradigm of technological innovation or build in their ecosystems for a
living. There is a middle path of course, and historically speaking that is
the best approach.

If this is what you love and part of your life purpose. Stick to this and
don't live in fear. Just keep walking...

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jeffreymcmanus
It's worth noting that the press release that was done on behalf of Ballmer
when he did his stock sale is standard industry boilerplate. The verbiage
(including the "diversifing his portfolio" phrase and the "I'm excited about
our products" bit) is literally identical to the language used following most
other insider stock sales. (Which is to say, it's meaningless as a barometer
of whether he plans to stay at the company or not, or whether he's going to
sell more shares or not.)

~~~
d0mine
_"excited"_ is a marker for a CEO lie according to the recent article on HN.
<http://searchyc.com/submissions/ceo+lie>

~~~
jeffreymcmanus
Right. More impressive for a CEO to say that the company's customers are
excited about their products, and to give examples of who those customers are.

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nkassis
The capital gain tax issue has been raised here but there is also the fact
that the stock market is hitting highs right now.

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biznickman
So the executives sell shares of the stock after a nice jump in the market
because they don't want complete exposure to the market as they did last time
the (real estate) bubble burst. "A diversification" is definitely a legitimate
justification of off-loading some shares.

I know people who saw their net worth fall from $150 million to $30 million
when the market collapsed last time. They've made much of it back and they may
not exactly be broke but all the rich people that saw their net worth
disintegrate last time around are not as interested in betting their entire
future on the stock market after seeing the existing vulnerabilities of the
system.

I have a feeling that a lot of this money (particularly from technology execs)
will end up reinvested in other areas ... including startups. Such a theory
would suggest that the bubble is still only beginning.

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gamble
Thanks to the government response to the financial crash, large companies are
sitting on mountains of cash they can use for stock buybacks to offset the
dilution from issuing options. Not to mention that the stock market is still
depressed. It's an ideal time for top insiders at large public companies to
use their options.

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dstein
If you plot a graph of QQQQ between 1990 and 2000, and compare it to the graph
between 2000 and today, you'll find that the technology sector is STILL
recovering from the first bubble burst. In fact, the NASDAQ could probably
rise about 50% from here and still be right in line with historical growth
rates.

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fmkamchatka
<http://en.wikipedia.org/wiki/Blue_Origin> This kind of stuff might require to
sell shares to finance too (in the case of Jeff Bezos). I'm sure it can apply
to other CEOs as well. Speculation is not the only thing you can do with
shares.

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Towle_
They know something we don't know.

A 5% increase in capital gains tax in 2011 shouldn't be enough for this
movement by these people. They _should_ be planning on holding onto their
stock indefinitely, especially at places like Amazon with no ceiling. Why
aren't they?

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Kilimanjaro
While it is very interesting to analize insider trading, I dare to say the
tech bubble is not about to burst, it is just shifting gears from big
companies selling packaged software (MS, Oracle) to small web startups focused
on the long tail.

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brudgers
> _"Recently, a number of alarming trades have been made inside major software
> companies"_

What makes the recent trades alarming?

Is the current pattern of trades different from those of the past?

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bradshaw1965
It's a shame print is a bit of a slump because you can't use the size of tech
and tech business magazines as a proxy for a bubble anymore.

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fleitz
Bill Gates selling $272 million is like a guy with a $100K RRSP selling $680
in stock.

Even the reference to Ballmer selling $1.2 billion under the 'guise' of
diversification, is not big news. Does anyone really think that MSFT is the
sole best stock to hold? Ballmer can probably get better returns by investing
in startups than by holding MSFT.

That he is diversifying his portfolio is merely the truth. What it doesn't
communicate are the reasons, as CEO of MSFT he could negatively affect the
price of their stock by giving any answer that belied an investing strategy in
which holding MSFT stock was not the best idea. He's pretty much bound by
fiduciary duty to his stockholders to give an answer which reveals nothing
about MSFT.

Although unpopular right now, if you want to call a bubble, look at gold and
other commodities, especially ones on which futures are bought and sold.

We don't have pets.com IPOs, we don't have a lot of public money flowing into
the tech sector. Yes, there are deals being made privately, but presumably the
companies buying them are buying them because the technology they created can
be better capitalized by augmenting an existing tech giant rather than via an
IPO.

If you want to find a bubble go look at who made tonnes of money in the real
estate bubble and look for them pouring that money into a speculative market.

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sabat
Seriously, we have to ask this right now, when we _might_ be starting to
emerge from the worst depression since the Great Depression? Bubble? What
bubble? Entrepreneurial activity != a bubble. It means capitalism is at work.

