Saturday, December 12, 1998

Tiptoeing through the stock market

By Donald Kaul

Strange things are happening. There was a comedian in the '60s, Red Buttons, who used that phrase as his mantra on his television show. He's one of those people, you don't know whether he's dead or just hasn't had a hit in a while, but if he thought the '60s were strange, he should see the stock market right now.

For example, an Internet stock called Amazon.com hit 220 last week, up from 22 a year ago. The amazing thing is not that Amazon gained in value tenfold over the course of the year. Stocks do that occasionally. The amazing part is that it did it without any earnings whatsoever. None.

Moreover, it doesn't really own anything -- hardly anything, anyway. A friend of mine put a pencil to it and figured out that, at $220 a share, Amazon's capitalized value exceeds that of the Union Pacific Railroad.

The Union Pacific, I might remind you, owns things -- land, right-of-way, track, locomotives, freight cars. It exercises a virtual monopoly over rail freight west of the Mississippi. It even pays a dividend.

Amazon is, essentially, a building full of computer jockeys and a whizbang of an idea. Yet it's worth more than an industrial giant.

Doesn't that seem a little odd to you? Doesn't it remind you of something, like for example the 17th century tulip bulb bubble that all but crushed the Dutch economy?

Let me refresh your memory. The tulip was introduced to Europe in the latter part of the 16th century (from the eastern Mediterranean, where it grew wild) and was an immediate hit. In the decades that followed, it grew in popularity, and eventually possession of fancy tulips became a sign of prestige.

From there it was but a short step to the deeper appreciation of the rarer blooms, which began to command extravagant premiums. Then madness set in. People, especially Dutchmen, began to speculate in tulip bulbs. Single bulbs of rare varieties were sold for as much as $25,000.

Charles Mackay in his 1841 classic, Extraordinary Popular Delusions and the Madness of Crowds, described it this way:

"Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuider Zee, and poverty banished from the favored clime of Holland.

"Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney-sweeps and old clotheswomen, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart. Money poured into Holland from all directions.

"The prices of the necessaries of life rose again by degrees: houses and lands, horses and carriages, and luxuries of every sort, rose in value with them, and for some months Holland seemed the very antechamber of Plutus."

Alas, the craze came to an end -- in 1637, as a matter of fact. The wisest of the speculators took their profits and sold out, which made others in the know nervous, so they sold, too. Soon everyone wanted to sell; a full-fledged panic ensued and prices plummeted.

"Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption," wrote Mackay.

Banks, which had accepted tulips as collateral for loans, were now left holding relatively worthless bulbs. With their wholesale failure, Holland was plunged into an economic depression from which it took years to recover.

I'm not saying stocks are tulips, but ...

Having figured out the numbers on Amazon.com, my friend called his broker and sold every stock he owned. He figured any market that valued a nonperforming stock so highly was not a market he wanted to be associated with.

I just wish I had his courage.

E-mail Donald Kaul at otcoffee@aol.com or write to him c/o Tribune Media Services. Inc., 435 N. Michigan Ave., Suite 1400, Chicago, IL 60611.