Republic Risk: The Real Risk… Is Temptation

We're starting to see some classic bubble behavior in the latest hype. If you're going to trade NVIDIA, keep your stops tight. If you're up, have an exit strategy. And if you're late... stay calm.

Equity Storm Watch Is GREEN on the S&P 500 and YELLOW on the Russell 2000

This morning, the divide between small-cap stocks and mega-caps is widening even more as investors continue to chase the most crowded trade on Wall Street. Tech stocks will continue to be irrational as well as the market participants. NVDA hit $800 this morning, and the mania is clearly not over. What’s worrisome is that retail investors are starting to chase the AI gains at these nosebleed levels. It’s getting close to “Bag holding” time.

Dear  Fellow Expat:

Good morning. 

The Dot Com Bubble was in full swing in my senior year of high school.

My senior history class teacher hosted a stock market game. We would all have hypothetical portfolios of $10,000 to start.

Any bids and sell offers had to be printed and handed to him. The teacher was the broker. (There were no commissions.)

We wrote the previous day's closing price on a card and bought shares before the next day’s opening. We had to use the Wall Street Journal or Baltimore Sun’s closing prices.

The Nasdaq was full-on “mania mode” in late 1999 and early 2000.

I understood that. I understood the difference between momentum and outright speculation. More importantly, I knew how detached reality was from traditional market environments.

 But I’m not really sure if investors at the time grasped that.

I certainly did. Two years prior, I’d read the 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles during the Asian Financial Crisis and reread it after the comical collapse of John Meriwether’s Long Term Capital Management in 1998.

I could see the irrationality behind it all… which would be crucial to my academic career, investing, business journalism, and work over the last decade.

I watched stocks with no revenue surge 15% to 20% daily. The bulk of them – of course, were in technology – and I dug into the Internet services hype of the time. 

We didn’t have reliable financial sites then, just the “Biggest Movers and Losers” chart in the Wall Street Journal backed up by a few blogs that were hyping stocks and warning about others.

I jumped on a company called Digital Island, which launched its IPO at $10 in June 1999. The underwriter was none other than Bear Stearns. 

The company was notorious for IPO conflicts of interest and paid a $1.4 billion fine in 2003 after a crackdown on IPOs by New York’s (now disgraced, then governor) Elliot Spitzer. Bear would get into derivatives trading like most other Wall Street shops after the IPO bubble.

Digital Island stock whipped up and down by the time my senior year started. To be honest, no one knew what the firm did besides “content delivery, networking, and hosting.”

I put almost every dollar into Digital Island at around $15 a share. (I also bought some McCormick & Co. (MKC) stock because my father was rooting for it every day of his life, so why not?)

Within two months, Digital Island stock would hit $148.

I sold it all near that level, then bought Cisco Systems (CSCO), which rode up another 30%.

In 2002, Digital Island collapsed and sold in an all-cash deal for $3.40 per share.

By the time the four-month stock market gain was over, the person in second place had generated about $14,000.

I had topped $124,000.

I won a prize: An Orange Crush soda wrapped in my HS newspaper that says: “You’re a Winner.”

It’s still in a box in my mother’s basement.