The skeptics who argued that Internet stocks were overvalued, in con- trast, came off as dour old guys who could merely say, “The stocks are overvalued because they no longer reflect fundamentals.” This was hardly a compelling argument that could compete in the public eye with the attention-grabbing stories supporting the Internet stocks.
“Wall Street was writing up over and over—these guys get it and these guys don’t,” said one high-level management consultant working with large technology companies. “Look how dumb these guys are. Everyone on the ‘get it’ side was lionized by the press. Endlessly the press was writ- ing about why the old use of P/E was stupid and why cash flow didn’t matter and why the traditional measures of real business should be sus- pended—across all sectors of the economy.”25
A key factor that enabled the enthusiasm to continue unchecked was the systematic diminution of skeptics. Year after year, the ability of any- one to effectively convey and provide compelling cautionary information
became less and less. Gradually but comprehensively, skeptics lost the at- tention of the media, they lost influence in their organizations, they lost money, they lost clients, and they lost stature. Although not completely silenced, they were gradually belittled, deprecated, and eventually ef- faced. The viewpoints of skeptics during this period did receive some coverage, particularly in more sophisticated periodicals like Barron’s.
However, their commentary was largely drowned out by the sheer noise of enthusiastic reporting. Bubbles inflate on the enthusiasm of the opti- mists, but what prevents them from crashing early is the shunning of the skeptics.
“The people who were the voice of reason and tried to bring some kind of historical perspective were viewed as antiques or just ‘not with it.’
The line was, you don’t realize this is a new world order or a new econ- omy,” remembered Bob Kagle of Benchmark Capital.26
The phrase “You don’t get it” humbled many seasoned executives into fearing that all of their accomplishments and experience in business sud- denly became a liability rather than an asset. It was the young, wired gen- eration that was now taking over and they knew how the game was played. Interestingly, this is a common theme in bubbles—the young generation overturns the old.
In a historical account of the go-go era of the 1960s, for example, David Dreman recounted, “Those who did not go along were pushed aside. A young gunslinger at the height of the go-go euphoria of 1967–1968 was interviewed on TV about his aggressive investment strategies. When the name of Benjamin Graham, whose measured ap- proach emphasizing full evaluation of risks and conservative pricing for- mulas, came up, the money manager said ‘the trouble with old Ben is that he just doesn’t understand this market.’”27
The market was split between the “go-go” and “squaresville.” In the 9 months to March 31, 1966, the Standard & Poors index of high grade common stocks declined 7 percent compared to 51 percent gain for “low priced stocks.” Similarly, the 25 best performing mutual funds were “ag- gressive funds” and gained 36–80 percent annually by 1966. That com- pared to conservative funds that made just 6 percent.
Steve Dow of Sevin Rosen Funds remembered painfully the four words, “you don’t get it,” that instantly seemed to discredit skeptics
during the Internet bubble, “Bankers—VCs, entrepreneurs. They said it often enough—it became the truth. They had enough success that we said, shit maybe they’re right.”28
Furthermore, the information and data necessary to illustrate the case of skeptics was far more complex and more nuanced than the obvious fact that Internet stock prices were skyrocketing and investors were get- ting rich. For the average person, determining the business fundamentals is all but impossible. For sophisticated analysts there are accounting pro- cedures that failed to take hold and indeed, as it turned out, were inten- tionally manipulated. But believing the skeptics increasingly required people to discard a lot of the observable data.
Perhaps most important, even if one didn’t believe the findings of these enthusiastic analysts, one often found oneself on the losing end of an investment, or missing significant business opportunities—whether in the public market, or as a venture capitalist, or when planning busi- ness investments.
“You suddenly don’t believe your own misgivings when it is proven correct that this time it is different,” Tony Sun, Managing General Part- ner of Venrock, remembered. “You don’t need to generate profits and you can make a lot of money without profits and it’s proven over and over again. Companies go public and the stock jumps ten times and it doesn’t even matter what the earnings are and you are reinforced by that.
Its hard to stand the ground on this onslaught.”29
According to a survey of venture capitalists still in business in 2004, over 50 percent of venture capitalists switched their opinion from being skeptical in the business opportunities of internet and telecommunica- tions companies to becoming believers during this period. Among these
“switchers,” the most commonly sited reason (43 percent) said that they switched because so many start-ups seemed to be succeeding at the time, eventually they had to rethink their beliefs. [Site: Survey by author. See:
www.skylight-insight.com/frenzy.]
Bill Hambrecht, of Hambrecht & Quist, saw the diminution of skep- tics as more than just systemic; he saw it as market-driven. “You don’t get paid for negative research,” he said, “As a matter of fact you get a lot of ill will from the guy because, basically, institutions want you to tout the stocks that they own. So, you know it’s hard to put that kind of stuff out and be listened to and get paid for it. The incentives are there to be pos-
itive. And even when you are negative—what you tend to do is move to things that you can be positive on. That went on in the eighties as well.”30 No amount of historical credibility seemed to enable skeptical views to break through the cacophony of enthusiasm. Even the most exalted in- vestor, Warren Buffett, was thought to have lost his touch when he decided to stay away from investing in Internet stocks. Ken Barbalato COO of Swiss American Securities, a member of Credit Suisse Group, remembers,
“Warren Buffett was discounted—he still had value—but if you looked at his investments during this time he lost considerable amounts of money.
So, Warren Buffett can say what ever he wants to say but sour grapes, right, Warren? That’s how you could look at it. He’s an old guy, he’s not getting it. Look at the value of his portfolio. It’s down X, it should be up.”31
The skyrocketing prices during bubbles seem to prove the skeptics wrong. The irony is that, in the end, the higher prices get and the more the skeptics are shunned, the more correct they become.