Tech Bubble Insights

The below links are all related.

  • Lessons from the tech bubble (thread)

    Last year, I spent my winter holiday reading hundreds of pages of equity research from the 1999/2000 era, to try to understand what it was like investing during the bubble…

    This thread is a humble reminder that the collapse of the tech bubble in 2000 wasn’t really a surprise. This reminds me of funds using derivatives to bet against the housing bubble leading up to 2008. Many were too early and found themselves squeezed by bank counterparties for more collateral until they had to puke their positions to stronger hands. It would be like filling in the right Powerball numbers for the wrong week.

    Right idea x wrong timing = Wrong

  • What happened if you Invested in all the pets.coms (thread)

    If you purchased $1 of all 1997 IPOs on 12/31/97, $1 of all 1998 IPOs on 12/31/98, and $1 of all 1999 IPOs on 12/31/99 at their respective market weights on those days (then did nothing), how much is that $3 worth as of 9/30/2020? *$3 invested in the Russell 3000 is worth ~$14.

    Jake’s thread dives into a complete answer. So try to answer before clicking the link.

    In case you care, my approach to the question:

    I started with some assumptions and estimates. For example, how many IPOs happened in each vintage (I guessed 100), what was a typical IPO market cap (I guessed $1B), and knowing that AMZN was a 1997 vintage I made the super conservative assumption that the other presumed IPOs (100 per vintage) all went to zero. So if AMZN IPO’d at $1B it’s up 1560x which means your portfolio, even with 299/300 companies being zeros, went up 5x or about 8% CAGR since the late 90s. I guessed a better survival base rate would be 10% of the IPOs, which meant realistically there are 30 surviving companies. If they were an order of magnitude less successful than AMZN they would have returned 150x each bringing the total “IPO portfolio” closer to 20x. So I took the over. I’d give myself a C.

    The poll prompted a lot of questions for me. Like what is the correlation between survival, returns, and market cap at IPO? For example, how much more likely is a top quintile market cap IPO to survive? Has the relationship meaningfully changed over time? Do companies’ ability to stay private for longer change the return prospects of IPOs long term?

  • Gorilla Game Investing (summary)

    This book is a framework for investing when a disruptive technology has been identified but the competition is wide open. Imagine buying all the companies and then selling the losers as they go down and re-balancing into the winners. This can make sense if the industry has winner-take-all dynamics. To me the strategy looks like you are trying to construct a long option on the company that will own the TAM. That re-balance strategy even looks like negative gamma…buying the rallying stock and selling the losers.

A giant realization everyone should appreciate from all these links…most companies go to zero. Single stocks have positive skews. Indices are just baskets of stocks with a rebalancing strategy. Indices have a negative skew. I try not to miss chances to reinforce your intuition of portfolio theory.

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