The Internet Bubble: Inside the Overvalued World of High-Tech Stocks--And What You Need to Know to Avoid the Coming Shakeout (Hardcover)

The Internet Bubble documents the latest incarnation of the world's second oldest profession: separating gullible investors from their money. Not since the 1920s has the US seen such a highly evolved stock mania machine involving media outlets, market pundits, bankers, brokers, pension funds, venture capitalists, and legion uniformed investors taking it all in -- and getting taken in. This has been going on for years without much notice. At last we have in Anthony and Michael Perkins, founders of The Red Herring, working as investigative journalists who use their insider contacts to go out and get the story.

As the founder of iTulip.com in November 1998, a parody of an Internet company created to draw attention to the Internet stock mania game, I take a special interest in the Perkins' excellent new book. Just as we do on iTulip.com, Anthony and Michael Perkins believe that the Internet offers tons of valid investment opportunities. But over time as the mania machine evolved, a perfectly good investment opportunity has turned into a circus for suckers.

What is not explained in the book is how such a financial mania starts in the first place. So let's back up a bit. Nearly every mania was sparked by the convergence of four events:

1) The nation hosting the mania survives a traumatic crisis such as a war or depression -- in the current instance, the Cold War ended. Optimism rules the day. 2) Following the crisis, tensions among nations decrease and international trade booms. 3) A discovery, new invention or technology offers unmeasurable benefits, creating a sense of limitless possibility. Without precident, the market has no guideposts to help investors set a fair market value for securities issued by corporations that manufacture the new technology. Hundreds of businesses crop up to capitalize on the flood of money available to fund the new businesses. Some of the optimism is justified. Imagine what the first railroads meant to commerce? Suddenly goods could be shipped inexpensively over long distances in a set time period at relatively low cost. A huge boon to the economy, but in 1857 a bust to investors. The benefits of the new technology turned out to be great but not infinite. 4) Interest rates fall in the rapidly expanding and deflationary economic environment -- deflation driven by global competition and rising productive capacity. The money supply is permitted to increase rapidly in the absense of apparent inflationary pressures. The excess liquidity does not show up in the so-called real economy as higher priced goods and services, instead inflation arises in the asset prices. Why? Because increased competition and rising capacity lower profitability. Financial assets become the only profit game in town. Speculation ensues. Starting in 1996, the money supply in the US began a precipitous climb, and with it the stock market in general and Internet stocks in particular.

Which brings us back to Anthony and Michael Perkins. They explain the actual workings of the mania machine from the inside through interviews with key players. They explain where the mania started and how it evolved, the participation of venture capitalists and investment banks, and they lucidly compare the Internet bubble to the Biotech bubble that popped in 1992. They debunk the New Economy. Finally, they tell you where to look for real value in Internet investing.

This is an important book if you're in the stock market and especially if you own Internet stocks. Buy it.

Anthony Perkins is the Founder and Chairman of Red Herring Communications and Publisher and Editor-in-Chief of Red Herring, one of the best known technology business magazines, and redherring.com. His brother, Michael Perkins, is the founding editor of Red Herring and the author of *The Red Herring Guide to the Digital Universe*.

This is what Anthony Perkins has to say about the magazine: ``In the old days, there was only a handful of people who looked at the world from a venture capital perspective as we do. In the Internet era, everyone has to look at it that way. Whether you're an investor in the public market or a PR agency trying to get new business, you must get early bets on new companies and hope that they become significant enterprises. That's where we come in."

It is precisely the ability of the authors to look at the world (at least, that section of it related to the Internet) in the same way that a venture capitalist would that accounts for the authenticity of their book. They characterise the Internet bubble as a world led by a brash new generation of entrepreneurs who command thousands on Internet startups, many loaded with venture capital or flush with cash from recent initial public offerings (IPOs). The upside, they point out, is that the Internet boom is real.The companies successfully driving the electronic highway have transformed the technology industry while also creating quality jobs and real wealth along the way. The downside is that the mania surrounding Internet companies has translated into too much venture capital, too many Internet start-ups and too many Internet IPOs, driving both private and public company market valuations to insane levels.

An Indian reader should be able to relate to this scenario. All that they have to do is to look at the absolutely dud companies the shares of which were sagging way below par value but perking up after the addition of the `infotech' or .com term to their names. In time, Indians will also be able to relate to the prediction made by the authors that individuals who hold stock in public Internet companies could experience a 50 percent melt-down in the value of their holdings if they don't sell before the Internet bubble bursts.

Whether they completely agree with the authors' point of view or not, readers of this book are bound to be intrigued by the bubble calculation methodology set out in it, and amused by some extremely mordant Doonesbury cartoons by the one and only Garry Trudeau that kick off the chapters. All in all a great book. Highly recommended.

While the authors are confident that the internet is here to stay (and grow), they are concerned about the insane valuations of internet stocks. On reading this book, any rational investor will go back convinced that the internet stocks are the tulip bulbs of the current era. One wishes small investors will heed this warning. But knowing the previous outbreaks of stock-market mania, not many will escape the ruinous effects of this one either.