January 19, 2002

The hardest word

George Gilder was one of the great boosters of technology stocks. Blaming interest rates for their crash is simply avoiding his own mistakes

Wynn Quon

There's nothing as sad as a Pied Piper that's lost his tune. George Gilder, one of the late great boosters of the techno bull market, has fallen from grace. A year ago, subscribers to his Technology Report (at one point reportedly numbering 60,000) would fall over themselves to buy the stocks he recommended. One outfit, NorthEast Optic, rose over 60% on the day he anointed it with his blessing. But now that the bubble's burst, Mr. Gilder has become known as the guy who called JDS Uniphase at US$140 a "ground floor opportunity." You may have received his junk mail in spring of 2000 ("Five steps to safely pursue fortune-making profits in tomorrow's biggest technology winners!") and if you were lucky you threw it away. The thousands who didn't were put through the wringer, losing up to 90% of their investment.

What does Mr. Gilder have to say about this fiasco? Is he contrite? Alas no. In an op-ed in the Financial Post on Jan. 12, he has a surprising comeback: It was all the government's fault. Here we had thought that the Internet affair was a classic case of speculative mania, when in actual fact, it was evil Mr. Greenspan who took away all our toys by raising interest rates. The logic of his argument is a pretzel to follow, but that's because it's a jerry-built mishmash designed frankly to get Mr. Gilder off the hook. It doesn't work.

Here's the simple bottom line of what happened in the tech boom and bust: Most of the dot-coms, the telecom startups, the Linux companies simply didn't make any money. It's as black and white as that. This meant that any large upward movement in prices would be unsustainable. The key to understanding how things got out of hand doesn't lie in interest rates but in mass psychology. As a species, humans just don't behave very well in crowds. There is a tuning fork inside each one of us which, when struck the right way, makes us move together in tragicomic formation. All it takes is some technological novelty and the jingle of profit and the crowds hum in manic earnestness. In the 1990s, investors got the sweetest siren call of the century. Investing in the Internet made our portfolios sing and our tuning forks resonate. It didn't take long for behavioral feedback loops to kick in. ("I bought at $20, it's now at $40, hey this is easy, I'll buy more"). Add in plenty of leverage and we were on a rocket ride to NASDAQ 5000.

The bust is just as easily understandable. For a free market libertarian, Mr. Gilder misses an obvious point. The evangelical vision he presents in his books and seminars is of a world with an "infinitude" of bandwidth and computing power. But with increasing supply, prices fall and profits disappear. That is the real legacy of both the dot-com boom and the bandwidth boom. We end up with way too many Web sites and a telecom industry on the ropes because of overcapacity.

We can summarize all this with one example. It wasn't Mr. Greenspan who bid the price of theglobe.com from US$9 to US$97 on its very first day of trading. Nor was it Mr. Greenspan who sold the company into bankruptcy when folks suddenly realized, hey, no-one's buying its product.

One of the clues as to how Mr. Gilder was blindsided by the tech bust lies in his infatuation with technology. In the mid-90s, he thought the technically savvy Internet Service Providers, such as Netcom, would prevail over the slower but financially more powerful Bell operating companies. But it was clear to most telecom insiders that the Bells would triumph, as indeed they did. Netcom, PSIX and hundreds of other ISPs went under. This lesson in the hard realities of corporate survival, that you can't win on technology alone, didn't seem to take. He continued delivering messianic seminars that trumpeted the latest telecosmic breakthroughs. While he entranced audiences with his vision of a technological utopia, boring things like profit margins and return on investment were missing from the mix. It was a fatal omission. His newsletter recommended stocks but listed no target prices. He used no valuation criteria, preferring not to stoop to the pedestrian ways of P/Es and price-to-sales ratios. What was JDS Uniphase really worth? $140? $1400? Without some yardstick, it was buy-at-any-price, the classic recipe for bull market disasters.

It'd be wrong to be too harsh on Mr. Gilder. In the end, he comes across as an innocent who believed his own rhetoric. Still, his attempt to shirk all responsibility doesn't put him in a good light. What do you say when you've led thousands of your followers into a swamp? "Sorry" might be a good start.

Wynn Quon is chief technology analyst at Legado Associates. wynn_quon@hotmail.com

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