Those of us who lived and traded through the "Tech Wreck" at the turn of the century as well as the 2008/9 credit crisis are acutely aware of what a bubble looks like. For me, though, with a trading background, I don't necessarily look at bubbles with trepidation; early on they can represent opportunity.
It is easy to look back, remember only the collapse and forget the boom that preceded it. The Nasdaq 100 tracking ETF, QQQ for example, rose from a close of 52.03 on April 30TH 1999 to close February 2000 at 109.50, an increase of over 110%. Many individual stocks did much better in that time period, even some that are now worthless. Lots of money was made from sub-prime mortgages and the CDOs that contained them from 2002-2007.
I have to remind myself of this as I look at the current state of social media stocks. Let's face it, anybody who really remembers the heady days of 1999 can see the signs. Everything is judged on potential, not profit, so Twitter (TWTR) who has never made any money, is worth $40 Billion, Facebook (FB) is a steal at 114 times earnings and Snapchat, who has never even brought in any revenue, let alone made a profit, can turn down $3-4 Billion offers.
The general public, always the last to join in, are being told by smug analysts that they are fools if they don't see the potential value of selling everybody's data. This holiday season, when people found out that I write about markets, they were all a-twitter (pun intended) about social media stocks as the future. To paraphrase the famous words of JP Morgan, the shoe shine boy is giving stock tips again.
Eventually, then, it is likely that things will start to unravel. There is no telling what the trigger will be. I suspect it may be an event that causes the public to question the desirability of a company keeping detailed records of their daily lives, but it could come from elsewhere. Whatever the cause, bursting bubbles are messy.
To me it is obviously a bubble, but at times I feel like the small boy, shouting in vain about the Emperor's state of undress. Those smug, contemptuous types of whom I spoke look down their noses and say that I "...just don't understand." The fact is, though, that as long as they continue to believe and to convince the general public, the bubble will keep inflating, and serious money can be made. You don't have to believe in the long term viability of a company to benefit from short term price appreciation.
I shall no doubt buy in to some of these frothy looking companies during 2014; as TWTR has shown us the short-term profit potential is so huge that one would be a fool not to. I shall, however, be doing so with my eyes wide open and my finger hovering over the sell button. If conventional wisdom shifts to where privacy is considered too great a price to pay for ease of communication, I'll be out in a shot.
At that point, the most suitable acronym for the stocks currently in vogue will move from SMAC (Social, Mobile, Analytics, Cloud) to SCAM (Social, Cloud, Analytics, Mobile). There are already rumblings in the US. How long before the unease at the intelligence gathering by the NSA morphs into unease at the amount of personal data Google (GOOG) and Facebook (FB) have on all of us? How long before national governments around the world take on the giants, whether those governments are concerned with individual freedom or upset at there being an entity with more information on their populace that they have?
Regarding the question boom or bust in 2014, then, the boom will continue, and the bust will come, but it may not be this year. By all means, join in the bonanza and make merry with FB, TWTR and any new issues that come along; just know that, at some point, reality will intrude, so these are essentially trading opportunities, not investments.