Investing in inflated Internet stock is like buying a lottery ticket.
This was the warning issued yesterday by renowned financial whiz Alan Greenspan, chairman of the US Federal Reserve - America's central bank - and the man with the most significant influence on the world's economy.
Greenspan said that the bubble that has seen Internet companies such as Amazon.com?s stock go sky high, despite having never made a penny could be set to burst.
"You have these pie-in-the-sky type of potentials for a lot of different vehicles. And, undoubtedly, some of these small companies which have stock prices going through the roof will succeed and they very well may justify even higher prices. The vast majority are sure to fail. That's the way the markets work," he warned.
In his first public comments on volatile Internet stock Greenspan said that investors were making, ?exactly the same sort of price valuation process that goes on the lottery.?
Some of it, is no doubt market frenzy. ?You will get some lottery premum in the stocks. Is there some hype on this? Of course there is.?
Greenspan is not the only high profile person to warn of Internet stock crashes. This week Barton Biggs, global strategist at investment bank, Morgan Stanley Dean Witter said he believes that we could be in a 100 day share bubble that is ready to go bang.
Speaking in Tokyo, he said that the current scramble for Internet stock is like the 99 day bubble in US biotechnology shares in 1991 when prices shot up by 140 per cent and then dramatically reversed in under six months. The biotechnology share prices took five years to recover, although it is worth pointing out that they are now double the value.
Biggs said that small investors were not applying any criteria in buying up Internet stock. ?They are buying Internet stocks strictly on the basis of their personal experience on the Internet?, he said.
Despite some share prices being ?pie-in-the-sky?, both Greenspan and Biggs agree that there are some companies that will succeed.
Greenspan said that investors on the whole had been admirable in supporting hitech startups: ?They do endeavour to ferret out better opportunities and put capital into various different types of endeavours prior to earnings actually materialising.?
Internet stocks dipped after Greenspan?s comments, but only temporarily - confidence was soon bolstered again by the news of an agreed takeover in which Yahoo will acquire Geocities for $3.56 billion.
One UK executive is more pragmatic about the Internet stock lottery. Speaking today at the Regent Conference for senior UK executives, Peter Bonfield, chief executive at BT told the audience.
"It may well be that there are going to be some spectacular winners. The thing about a lottery is that a lot of people win a lot of money so it's not all bad."
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