Dispatches: When the bubble bursts

If you invested in Net stocks when the ride was just beginning, things must be looking pretty good right now. But don't get too confident. The gig is just about over!

Those three poor explorers who wanted to traverse the globe in a weather balloon earlier this year were glorious losers. At least stuck to the red clay earth of outback Australia all they had to endure was personal failure and some occasional ridicule.

Small investors who have hitched a ride on the speculative Internet bubble as it pushes into the stratosphere are risking much more. When the bubble bursts most of the gamblers will all come screaming back to earth on a painful one way ride. Smarter investors who apply all the usual rules about long-term value and return on investments won't have much fun either for a while, but at least the stayers will be buttressed against the worst falls.

When the gold bubble burst gold stocks fell 50 per cent in six weeks and another 50 per cent in the next six months, according to some reports. Net stocks are already attracting some unflattering comparisons.

Face the facts, some of this stuff is crazy. Companies with revenues in the tens of millions or hundreds of millions now have market capitalisations higher than multibillion dollar organisations like General Motors and Boeing. For the Amazons and Yahoos of the world, the market caps are based on perceptions about long-term market share prospects. Unfortunately, too many stocks are riding the curve on the momentum of a million small punts.

So how has it all come to this? There are a couple of reasons really.

Firstly, the internet really is different, it has changed the rules many companies operate by and it will make great and genuine fortunes for many investors the old fashioned way -- shrewd investing and patience over an extended period.

The problem is that markets have a tendency to overreact either negatively or positively, and what we are experiencing right now is too much of the latter.

When the correction comes it will be short, ugly and brutish.

Secondly, the US economy is fundamentally as strong as it has been for decades and unemployment is down at 1960s levels. Add to that the improving fortunes of some of the Western European countries and suddenly there are of lot of people around with surplus wealth to invest. In the UK and in Australia the privatisation of government assets has also introduced a whole new generation to the joys of trading.

And finally and most problematically, the Internet has spawned a new industry which itself feeds directly into the boom and will no doubt fire the bust. Online trading has opened the share market up to a mass audience in the US and increasingly here as well.

Coupled with this, cheap trades make investing seem attractive, and spending your money on pork belly futures is now just as easy as wasting a few hours playing Sim City. Unfortunately cutting out the middleman -- the broker and the expertise that comes from that role -- pays for the cheapness.

Too many Internet investors are playing the share market like it's a casino, betting high while the bank is losing big-time but foolishly believing that their luck will run forever. It won't, it can't. The casino never loses because its eye is always on the long term. If you want to bet on Net stocks, take a leaf out of its book.

Andrew Birmingham is the Chief Operating Officer of IDG Communications.andrew_birmingham@idg.com.au

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