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Interesting article, I thought

		January 2, 2000
		Humbling Lessons From Parties Past

		Issue in Depth 

		BENJAMIN GRAHAM, co-author of "Security Analysis," the 1934
bible of value investing, long ago put his finger on the most dangerous
words in an investor's vocabulary: "This time is different." 
		Pricing in the stock market today suggests that things
really are different. Growth stocks, especially those associated with the
information revolution, have soared to dizzying heights while the stocks of
companies associated with the older economy have tended to languish. Well
over half the stocks on the New York Stock Exchange and Nasdaq are selling
at lower prices today than they did on Jan. 1, 1999. 
		It is not unusual today for new Internet issues to begin
trading at substantial multiples of their offering prices. And after the
initial public offerings, day traders rapidly exchange Internet shares as if
they were Pokémon cards for adults. 
		As we enter the new millennium, how can we account for the
unusual structure of stock prices? Does history provide any clues to
sensible strategies for today's investors? 
		To be sure, we are living through an information revolution
that is at least as important as the Industrial Revolution of the late 19th
century. And much of the current performance in the stock market can be
traced to the optimism associated with "new economy" companies -- those that
stand to benefit most from the Internet. The information revolution will
profoundly change the way we learn, shop and communicate. But the rules of
valuation have not changed. Stocks are only worth the present value of the
cash flows they are able to generate for the benefit of their shareholders. 
		It is well to remember that investments in transforming
technologies have not always rewarded investors. Electric power companies,
railroads, airlines and television and radio manufacturers transformed our
country, but most of the early investors lost their shirts. Similarly, many
early automakers ended up as road kill, even if the future of that industry
was brilliant. 
		Warren E. Buffett, chief executive of Berkshire Hathaway and
a disciple of Graham, has sensibly pointed out that the key to investing is
not how much an industry will change society, but rather the nature of a
company's competitive advantage, "and above all the durability of that
		Yet the Internet must rely for its success on razor-thin
margins, and it will continue to be characterized by ease of entry. A drug
company can develop a new medication and be given a 17-year patent that can
be exploited to produce above-average profits. No such sustainable advantage
will adhere to the dot-com universe of companies. 
		Moreover, the "old economy" companies may not be nearly as
geriatric as is commonly supposed. We still need trucks to transport the
goods of e-commerce, as well as steel to build the trucks, gasoline to make
them run and warehouses to store the goods. 
		Precedents of recent decades offer many valuable lessons to
today's investors. Consider the "tronics boom" of 1960-61, a so-called new
era in which the stocks of electronics companies making products like
transistors and optical scanners soared. It was called the tronics boom
because stock offerings often included some garbled version of the word
"electronics" in their titles, just as "'dot-com" adorns the names of
today's favorites. More new issues were offered than at any previous time in
history. But the tronics boom came down to earth in 1962, and many of the
stocks quickly lost 90 percent of their value. 
		Another parallel to today's market was seen in the 1970's,
when just 50 large-capitalization growth stocks, known as the Nifty 50, drew
almost all the attention of individual and institutional investors. They
were called "one decision" stocks because the only decision necessary was
whether to buy; like family heirlooms, they were never to be sold. In the
early part of that decade, price-to-earnings multiples of Nifty 50 stocks
like I.B.M., Polaroid and Hewlett-Packard rose to 65 or more while the
overall market's multiple was 17. The Nifty 50 craze ended like all others;
investors eventually made a second decision -- to sell -- and some premier
growth stocks fell from favor for the next 20 years. 
		The biotechnology boom of the early 1980's was an almost
perfect replica of the microelectronics boom of the 1960's. Hungry investors
gobbled up new issues to get into the industry on the ground floor. P/E
ratios gave way to price-to-sales ratios, then to ratios of potential sales
for products that were only a glint in some scientist's eye. Stock prices
surged. Again, as sanity returned to the market and more realistic estimates
of potential profits were made, many biotechnology companies lost almost all
of their value by the early 1990's. 
		The lessons here are clear. Occasionally, groups of stocks
associated with new technologies get caught in a speculative bubble, and it
appears that the sky is the limit. But in each case, the laws of financial
gravity prevail and market prices eventually correct. The same is likely to
be true of the dazzling stocks in today's market. 
		Few of the Internet darlings will ever justify their current
valuations, and many investors will find their expectations unfulfilled.
Even supposedly conservative index-fund investors may be surprised to know
that very significant shares of their portfolios are invested in information
technology companies whose P/E and price-to-sales ratios vastly exceed even
the sky-high multiples reached during those past periods of market
		At the very least, investors might well start the year by
examining their portfolios, to see if their asset allocations are
appropriate for their stage in life and their tolerance for risk. 
		Burton G. Malkiel is an economics professor at Princeton
University and the author of "A Random Walk Down Wall Street" (W.W. Norton).