Of Froth and Bubbles
April 7, 2012
Sometimes I tend to think that bubbles are all bad. I keep a book on my shelf titled "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay, LLD. This book was originally published in 1841. I read portions from time to time to remind myself that bubbles (including those in the South Sea) come and go.
Sometimes it is good to be reminded of the past -- even if you lived through it. Here is a link to a lengthy, but thoughtful, blog post on the "bubble" of the late '90s: Peter Thiel's Startup Class Notes. My favorite quote from this post is "Bubbles arise when there is (1) widespread, intense belief that’s (2) not true." This is, of course, in different words what Mr. Mackay might have said about Dutch Tulips or witches in Salem.
It seems to me that bubbles (good, bad or indifferent) airse when there is a lot of money hanging around with the result that people do irrational things with it. The recent $646 million lottery is a good example. As the pot got bigger the odds got smaller, but the rate at which money poured in increase. More money chasing smaller odds? Go figure.
Congress has just passed, and the President has just signed, a new law that is supposed to support capital raising by smaller companies. It contains the so-called crowd-sourcing provisions that have gotten so much press. It will be seen if this does something or nothing for small companies, but one thing it might do is send a lot of small investor money chasing every smaller odds of success.