Some crazy stuff is happening in the tech world:
- Earlier this year, Facebook was valued at $50 billion
- LinkedIn went public this month, in an offering that valued the site at $4.3 billion (and the share price doubled on its first day trading!)
- Groupon is eyeing an IPO that could value it at as much as $20 billion
- Pandora has just priced an IPO at about $1.3 billion
- Twitter is rumored to be worth $8 to $10 billion
- Gilt Groupe just raised $138 million at a billion dollar valuation
- Even the makers of FarmVille are thinking of going public, with a predicted value of nearly $15 billion. These huge numbers have inspired many a pundit to ask: Are we in a tech bubble? Again?
Dot-com booms and busts weren’t exactly pleasant the first time around in the late ’90s—just ask AOL or Yahoo. The stock market crash from 2000 to 2002 was responsible for a loss of $5 trillion dollars and tons of jobs. Are we going to repeat the mistakes of our past?
Signs of a Bubble
According to Business Insider, the following are signs that there’s a bubble:
- High company prices compared to the raw, hype-less data on how a company is doing
- Everyone’s caught up in the buzz and justifying their huge expectations by looking at what everyone else is doing
- Investors start to act as though rising prices are the same thing as awesome business fundamentals; they borrow tons of money in order to bet on the sector’s continuous rise
Is This a Tech Bubble?
Some signs point to yes and some point to no:
- No. Some hot tech companies have high multiples (prices that they’re going for compared to their fundamental worth) but not as widespread or as outrageous as in the ’90s
- No. Some people are starting to dive in headfirst, but the tech investment craze is nowhere near as over-the-top as it was during the first tech bubble
- Yes. There is actually a lot of leverage and borrowing going on, in the form of stimulus packages from governments, debt from consumers and the government, and lots of low interest rates
No one can say for sure whether or not the current tech success is a bubble (though if it is, signs tell us it might not be as bad as in the late ’90s). But, a dose of perspective: The economy at large experiences big ups and downs, too, and the tech sector could be experiencing a natural cycle. Either way, tech isn’t the end all and be all, as it will be influenced by the broader economy. The future of the stock market is as unsure as ever—many economists predict huge gains this year, but skeptics suspect that we’ve overvalued the impact of the recovery. So, examining technology alone may not give us a complete picture of the future.
Invest Long-Term and Spread Out Your Risk
Investing should be a long-term process because that will afford you the time to weather both the good and the bad. As a result, we recommend against buying up tons of stock in individual tech companies (or any other companies, for that matter). Instead, think about spreading out your risk. That way, if one company or sector falters, you’ve got other things in your portfolio to fall back upon. Our favorite way to invest in a little bit of everything is through index funds (read here for what those are and how they work).
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