American Consequences - August 2017


name (like Powertron Ultrasonics) doubled and tripled the day of their IPOs and traded as high as 100 times earnings. The mania pushed the broader market higher for a little while, as it often does. The Dow Jones Industrial Average peaked at 734.9 in late 1961... and bottomed at 535.8 in early 1962 – a 27% nosedive. Manias always end badly, even when they’re about profitable companies. It happened again in the late ‘60s and early ‘70s, when the so-called “Nifty Fifty” companies (50 popular large-cap stocks on the NYSE) were presumed to be such wonderful businesses that they could be bought at any price, even 80-100 times earnings. Stocks like Polaroid and Avon Products soared, and they ended up losing 80%-90% of their value as they hit bottom in 1973 . It happened in the late 1970s when gold and gold stocks (many with no revenues or profits) roared, ruining many investors in the early 1980s when then-Federal Reserve Chairman Paul Volcker ratcheted interest rates sharply higher. Gold peaked at $850 an ounce in January 1980 and fell about 65% to right around $300 per ounce by mid-1982. It finally bottomed around $250 per ounce in 1999. It happened during the biotech boom of the 1980s, when biotech stocks soared, most with no profits, some with no revenues. It happened in the late 1990s when anything with “.com” at the end of its name (many with no profits) was presumed a great investment. It happened with mortgage

providers and homebuilders in the early 2000s. And now in 2017, it’s happening with fast- growing visionary businesses that think they’re imitating Amazon, like Snap and Uber. With zero profits to invest back into their businesses, these companies will eventually fail... And investors who piled in will suffer. It’s always a bad idea to participate in a mania. Investors forget every single time that everything is cyclical and manias always crash after a few years. It’s easy to see why it’s wrong to emphasize growth and vision over profits: Without profits, you’ll go out of business and your vision will die. But looking into the future is hard. Let’s instead look backward at a historical “loss is the new black” moment from the dot-com era. This story was published in the Wall Street Journal on May 16, 2000 in an interview with then-CEO of, Michael Barach. was an online health- products retailer. It offered “ 30,000 vitamins, herbs, and supplements. And expert advice. On everything from breast tenderness to gout. In complete and total privacy .” Losses may be the new black, but you’ll freeze to death if that’s all you’re wearing when the weather changes.

50 | August 2017

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