Dot-com Bubble & Investing: What Can You Learn?

This article is based on my reading of Easy Money, a book written by Philip Coggan who is columnist at The Economist and former Investment Editor for the Financial Times.

What Is the Book Easy Money about?

Easy Money - By Philip Cogan

I found Easy Money in the library of University College London.

Somewhat, the title got my attention.

I was expecting a ‘get-rich-quickly’ book. Instead, the book surprised me with a deep analysis of the post-dot-com bubble world.

Easy Money offers an interesting analysis of the business people looked at the world in 2002, right after the dot-com bubble had burst. So the book describes the shift in ways traders, employees, and entrepreneurs think about money.

Why Should Easy Money Interest Investors?

The dot-com bubble had a massive impact on the finance industry. It changed the way we perceive making money, but it was also the beginning of the FinTech revolution.

The New Gambling Culture

The dot-com bubble led investors to invest on the stock market as if there were buying lottery tickets. Examples of overnight millionaires changed how people thought about money. Investors lost patience and were looking for quick ways to get rich.

Many started speculating, thinking they were doing wise investments.

But the result was terrifying.

Investors became far from rational in their investment decisions. The problem was their overconfidence about their ability to pick the right stocks. Almost every stock went up. You could pick whatever and make money… until the bubble burst.

Bubbles are interesting phenomenon. They’re cyclical and seem unavoidable.

So knowing how people behave before and after a bubble burst is a good way for you to be prepared for the next ones.

Current Trends Coming from the Dot-com Bubble

Philip Coggan argues that the dot-com bubble has influenced the world with the following trends:

Incentive shares: The success of IPOs helped many employees to become millionaires. This has had a deep effect on employees’ commitment. Now, employees want to become shareholders to be part of the company’s success.

Rise of venture capital: The Dot-com bubble encouraged the creation of specialized funds that invest in early stage startups. This job is totally different from the traditional private equity, which was mostly based on LBOs.

Diminution of profits because of the Internet: The Internet has made competition easier and easier. As a result, Philippe Coggan argues in Easy Money that profits will inevitably diminish.

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Philip Coggan’s Advice on Investing

Easy Money also gives plenty of advice to investors. Here are my favorite ones:

1. Avoid Day Trading
2. Do Not Speculate
3. Be Patient When You Invest
4. What a Defensive Investor Should Do
5. Focus on Execution
6. Three Simple Principles to Keep in Mind

1. Avoid Day Trading

Day trading is a bad practice. It’s not because the Internet made it easier to trade that you should trade more often. In reality, most day traders lose money. Day trading is only being beneficial for brokers.

As Jeremy King said:

“The only way to make money from day trading is to write a book about it”.

2. Do Not Speculate

One click suffices to buy or sell stocks. As a result, people tend to speculate more.

Another explanation to why we speculate more is that there’s less human interaction. We don’t have to call a stockbroker to buy stocks. Picking wrong stocks is no longer shameful because nobody will be know that we failed.

3. Be Patient When You Invest

The stock market can make us rich—or at least richer—but we must be patient

Easy Money’s underlying theory is that there we will no longer experience fast growing market—I’m not sure I agree with this statement.

Basically, returns are supposed to be lower because more and more people have access to the market.

4. What a Defensive Investor Should Do

Since we can only expect lower returns, Philip Coggan recommends to adopt a defensive approach: the “buy and hold”. You should save a substantial part of income every month and invest it in shares for a long period.

It’s aligned Graham’s approach of defensive investment. Investors must avoid growth stocks—called ‘get-rich-quick’ stocks—because they involve lots of risk.

5. Focus on Execution

Easy Money underlines a key principle of entrepreneurship: Idea is nothing compared to execution.

It emphasizes an interesting quote from Ajaz Ahmed:

“Companies need to think what makes something indispensable to a customer. Consumers are ruthless because they have so much choice. Too many people think there is a short cut to success, a “secret” sauce. A lot of people dream of running their own business but every thing is in the subtleties, the execution.”

6. Three Important Principles to Keep in Mind

The book will also remind you of three important principles that we all tend to forget:

1. High sales do not make high profits. High profits = Price > Cost
2. Just because it’s a brilliant invention; it doesn’t mean it’s a brilliant business (e.g. Concorde: supersonic travel)
3. Industries that are too competitive industries drive prices down (cf. Porter’s Five Forces). And it happens sometimes at a level that is not sustainable (e.g. Airline industry).

Take Away

Be fearful when it seems too easy to make money on the stock market.

 

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