Charles Kindleberger's Manias, Panics, and Crashes is the most important book ever written on the subject of investment bubbles. In it, Kindleberger catalogues the rises and inevitable falls of various investor favorites throughout history, ranging from tulip bulbs to shares in the South Sea Company to RCA stock in the 1920s. If Kindleberger ever updates his book, he should add a whole chapter about last week in the U.S. stock market, which offered a series of resonant--and painful--examples of investor self-delusion.
The delusion, of course, was all about the Internet, and the so-called dot.com companies. eBay's stock exploded, Earthweb went public and rose more than fourfold, and Theglobe.com, a company with $1.7 million in revenue, saw its stock price jump from $9 a share to as high as $97 a share in one day before closing at $63 (a tidy 600 percent rise). But the strangest story actually belonged to a company without .com at the end of its name, namely tiny Internet service provider Avtel Communications Corp.
On Thursday, Avtel issued a press release announcing that it was introducing ADSL service (asymmetric digital subscriber line) in downtown Santa Barbara. For downtown Santa Barbarians, this was good news. ADSL is a way of accessing the Internet that offers blazing speed and the ability to access the Net and talk on a phone simultaneously. Although you need an ADSL modem and your local phone company has to have ADSL technology available, the service works much better and faster than ISDN. Next year is expected to be the year in which phone companies around the country introduce ADSL as a common feature.
But while Avtel's news was important to the people who were now going to be able to find out what a T-1 line was like without having to pay for a T-1, it hardly seemed to be big news to anybody else. Avtel doesn't own a patent on ADSL technology, and it doesn't manufacture ADSL modems. And the company didn't pretend that any of those things were true. But it didn't matter.
In the best example yet that a sucker is born every minute, investors piled into Avtel last Thursday, sending the stock from $3 a share to $13 a share by midday. Avtel had something to do with the Internet. What else did you need to know? Then the day traders, momentum players, and fools jumped in en masse. By the end of the day, Avtel's stock had risen from $3 a share to $31.
That's right. If you were an Avtel shareholder who went bowling all day Thursday, when you came home your shares were 1,284 percent more valuable than when you woke up in the morning.
At that point, the Nasdaq stepped in, and actually halted trading in the stock all day Friday until Avtel could clarify its first release. It did so, in unusual detail, explaining how much its service would cost subscribers (somewhere between an extra $70 and $240 a month, not unreasonable for heavy Net users) and stressing the fact that the service had been rolled out only in one three-mile section of Santa Barbara. The company also said that published stories to the effect that Avtel had plans to introduce the service nationally were mistaken, the product of confusion between Avtel's ADSL service and a new Internet-access business the company is taking national.
The thing about this story is that it is not the tale of an Internet company tricking the public into buying its shares. While the initial Avtel press release is stylistically hyperbolic, it clearly stated that the service was only available in Santa Barbara, and that the only firm plans for further rollout involved two other California towns. ADSL is not some radical new technology. Every major Bell company has plans to introduce it in some form in the next year. So Avtel didn't mean to trick anyone.
That's why this is such a wonderful (or sad) story about self-delusion. There's no way anyone who bought this stock at $15 or $20 a share could have been looking at the company's fundamentals. They couldn't really even have read the press release. They were trading purely on momentum. In that sense, what happened with Avtel is not very different from what's happened to the dot.com stocks, with one important distinction: The Nasdaq stepped in and halted trading.
In doing so, the Nasdaq effectively slapped investors in the face and said, "Wake up!" When Avtel's shares opened Monday morning, the stock was all the way back down to $3, from its previous close of $31. In the course of the day, the stock actually bounced all the way up to $15, and then closed at $10 1/2, still a hefty 250 percent leap from its Wednesday close, but perhaps not unreasonable given its successful introduction of ADSL.
The curious thing to think about is what might have happened had the Nasdaq not stepped in. Eventually the market would have woken up, one presumes. But as last week demonstrated, we are living through a moment in which manias have become almost common occurrences, in which ignoring anything resembling fundamental analysis has become conventional wisdom. In the case of Avtel, the consequences are insignificant (except for those who bought at the peak). But the continuing saga of Internet mania raises broader, and more troubling, questions about the market's collective rationality. In the land of the blind, the one-eyed man may be king, but are there any one-eyed men left?