Hype around IPOs is nothing new. You can go back to the 1700s, during the South Sea Bubble, to see it play out.

All it took was a company with wonderous possibilities, a chance to get rich, and a public eager to buy. The booming bull market helped set the stage for crazier offerings. And it worked.

The craziest by far was not the company trying to extract silver from lead or trade in human hair or build a perpetual motion wheel but for “a subscription advertised, and actually opened, for an undertaking, which shall in due time be revealed.” Just think of the possibilities!

The Dotcom Bubble is a more recent, perfect, example of the craziness. In 1999 alone, there were 478 IPOs. Almost 80% percent were tech stocks. Over 70% had no earnings. It didn’t matter.

The average first-day return for IPOs in 1999 was 71%! The environment was perfect. Public enthusiasm was at its peak, the internet brought infinite possibilities, and the stocks brought a chance for instant wealth. And the first-day pop was manufactured.

Quote for the Week

All booms are alike. The stage varies, but fundamentally they are as drops of water. Customs, like costumes, change from force of environment and economic conditions, but human nature remains the same. The autumn boom in Wall Street resembled all other stock booms, because the psychology of the boomers has not changed and cannot change. The Tulip Craze in Holland, or John Law’s Mississippi Scheme in France, or the South Sea Bubble in England in most things were the counterparts of the present speculation in the country. After all, booms are made by men, and not by stocks or flowers or town lots or wheat or mines or war. — Edwin Lefevre 1915 (source)

Quote for the Week

It seems a truism to say that the old-time common-stock investor was not much interested in capital gains. He bought almost entirely for safety and income, and let the speculator concern himself with price appreciation. Today we are likely to say that the more experienced and shrewd the investor, the less attention he pays to dividend returns, and the more heavily his interest centers on long-term appreciation. Yet one might argue, perversely, that precisely because the old-time investor did not concentrate on future capital appreciation he was virtually guaranteeing to himself that he would have it, at least in the field of industrial stocks. And, conversely, today’s investor is so concerned with anticipating the future that he is already paying handsomely for it in advance. Thus what he has projected with so much study and care may actually happen and still not bring him any profit. If it should fail to materialize to the degree expected he may in fact be faced with a serious temporary and perhaps even permanent loss. — Benjamin Graham, 1958 (source)

Quote for the Week

Every great crisis reveals the excessive speculations of many houses which no one before suspected, and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever…

They speculate with it in bubble companies and in worthless shares, just as they did in the time of the South Sea mania, when there were no banks, and as they would again in England supposing that banks ceased to exist. The mania of 1825 and the mania of 1866 were striking examples of this; the delirium of ancient gambling co-operated with the milder madness of modern overtrading. At the very beginning of adversity, the counters in the gambling mania, the shares in the companies created to feed the mania, are discovered to be worthless; down they all go, and with them much of credit.

The good times too of high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it, there is a happy opportunity for ingenious mendacity. Almost everything will be believed for a little while, and long before discovery the worst and most adroit deceivers are geographically or legally beyond the reach of punishment. — Walter Bagehot (source)