Is David Einhorn Right About a Tech Bubble?

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On Wednesday, world-renowned hedge fund manager David Einhorn told CNBC that we are witnessing another tech bubble. He cites several phenomena as evidence, including:

  • Irrational valuations
  • Irrational enthusiasm on tech stock IPOs
  • Short sellers being forced to cover because of losses

Despite all of these points, he does qualify his claim in saying that this tech bubble is just an echo of the last tech bubble. The bubble is limited to only a few stocks and sub-sectors, and the public isn’t involved. Furthermore, he admits that people recognize this as a bubble.

These last points in particular indicate to me that the term “bubble” is being applied incorrectly. If we look back at some examples, such as the tech bubble of the late 1990s and the housing bubble from the mid 2000s, we find that the mass psychology of investors had a lot to do with the bubble. People didn’t believe that there was a bubble. Tech investors didn’t care if the companies that they were investing in had revenues, profits, or dividends.

Home buyers didn’t buy houses simply as places to live, but as investments — they planned on flipping them, and because of this, they bought houses with very little money down. Furthermore, in the housing bubble period, the banks and mortgage companies were just as caught up in the mania as the home buyers: They didn’t care who they lent money to or how much money they lent because so long as the loan’s collateral, the house, was gaining in value, it didn’t matter whether the borrower could repay.

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