Analysts Claim They Saw Fall Coming, So Why Did Everyone Lose Money?

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Following the 1987 stock market crash, which saw the Dow Jones Industrial Average lose 23 percent of its value in one day, no one owned stocks. Or at least no one admitted to owning stocks on the day in question.

Talk TV was less ubiquitous in those days, so money managers plied their prescience in the pages of the financial press. Only idiots didn’t see the Oct. 19 crash coming, they said.

Imagine my consternation when I learned I was the only loser not to have sold my stocks before Black Monday.

Twelve and a half years later, money managers are claiming a similar degree of foresight. Remember all those tech bulls, who for months defended the sky-high valuations on anything with a dot-com extension or Internet connection with the mantra: “You gotta’ be in tech, you gotta’ be in tech”?

Now the group has turned conservative. “You want to own quality companies, the technology blue chips,” analysts and fund managers advise. The Ciscos, the Intels, the Oracles, the Suns. The companies that make a profit. The ones whose niche can’t be defined by three characters (B2C, B2B).

So who’s been chasing all the profitless wonders the story stocks that soar three, four times their initial offering price on the first day of trading, creating instant millionaires and multibillion-dollar companies despite minimal sales and no profits?

The big boys aren’t quick to own up to their mistakes. Sometimes a highly touted stock just falls off the radar screen when the stock performs miserably.

Growth in losses

Take eToys Inc., for example, the largest online retailer of toys. The stock quadrupled following its IPO last May to $81, giving it a market value of $8.18 billion. One analyst said it could be “one of the greatest growth stories of the decade.”

EToys actually has revenue: 1999 sales ($30 million) were about the same as the company’s losses ($29 million).

The stock last week was trading at $6.38 a share, paring the online retailer’s market capitalization to $768 million and delivering a 76 percent loss to anyone who bought and held the IPO. While eToys’ sales soared in the fourth quarter of last year, so did losses. Analysts would rather not be reminded of their e-tailer enthusiasm.

What about all those red-hot Linux IPOs? Linux is a free operating system available on the Internet. VA Linux Systems Inc., which makes software and computers for the Linux operating system, still holds the U.S. record for first-day gains for an IPO, 698 percent.

At the time, it didn’t seem to matter very much how a company was going to turn a profit when the underlying commodity was free. After hitting a high of $320 on Dec. 9, the day of its historic IPO, VA Linux shares have gravitated back to earth, well before the Nasdaq balloon started to lose air last month. At $35.75 a share last week, the stock is still above its $30 offering price.

Cheaper is better

There are dozens of tales like these. Did day traders and soccer moms create all the froth, with the IPO underwriters and buyers safely out of positions when the deluge came?

In truth, many analysts have been warning of a crash in technology stocks in some cases, for years. This group, as well as the bulls, was quick to drag out a favorite cliche, which turns up after every sizeable shakeout in a market: the correction is healthy.

Healthy for whom? Surely not for the folks who own the shares and are taking a licking. And why is the analyst-cum-therapist interested in the collective good of the market when previously all he cared about was his own bottom line?

The prize for least insightful comment following a purge goes to the die-hard bulls who were bullish at the highs and are “even more bullish now.”

If you liked it at $80, you should really love it at $40.

Caroline Baum is a columnist for Bloomberg News.

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