terça-feira, outubro 25, 2005

Bubble Bug

(This article was originally published in April, 2000. Still good for strategic thinking)


At long last, we saw the inflated stock market bubble burst. What was the excuse? The ruling by U.S. District Court Judge Thomas Penfield on Microsoft’s alleged monopoly. The aftermath, as we saw, was the bull-turned-bear-well-maybe-not-quite effect that made all those triple-digit p/e technology stocks tumble.
Is Judge Penfield to blame for the vaporization of hundreds of billions of dollars worth of tech-stocks? Well, not quite…
As I watch NASDAQ’s ticker on April 6, Thursday, with most figures turning green again, I come to realize that the newest by-product of the New Economy is NASDAQ itself. With most of its bulk operators running sophisticated programs to track portfolios, some with proprietary AI (Artificial Intelligence) modules built into, NASDAQ’s critical operations are mostly decided by computers, not humans.
And, although most AI algorithms may differ, they will share roughly the same strategy, which is to maximize returns for investors on a snap. Besides that, most market information today is widely available through the Internet, so there aren’t too many “new secrets” around. All the moves are emotionally built into the programs’ logic, in similar ways.
Was the burst inevitable, predictable? Well, no doubt about it. As it was also reasonable to predict that after a couple of large drops (2 consecutive “largest-in-history” for that matter), investors would come back again to play with profits and avoid further drops.
Whith most tech stocks still overvalued, the investor market will not recognize that. We may see further declines in the indexes, but not likely experience a huge crash, which would send many new billionaires straight to the streets to sell, well, Apples!
The reason why most long-term small investors need not worry is that every stock market professional has roughly the same mindset. Information Technology is more than just the New Economy’s powerful engine. It is the investors’ too! As information, decision and trading are done in the milliseconds, there are hundreds of millions of decision cycles within every stock-market day. With similar patterns, similar flavors.
So where will this whole thing lead us? Probably not too far off from where we are today. The Bubble Bug has been identified, but not eliminated. It is, on IT jargon, on quarantine. Unless some new financial genius devises a new model, we will watch the NASDAQ stocks performing pretty well over the years.

Eduardo Guy de Manuel
April 6, 2000

posted by Unknown @ 10/25/2005 12:03:00 PM