Review & Outlook

Our take on the investing, financial, & economic themes of the day

The Changing Structure of the Economy

24 March, 2015 by Ben O'Brien in Commentary

What makes the tech bubble debate that I wrote about in the last post particularly interesting is that despite the prevalence of what appear to be outlandish company valuations, there is of course as always another side to the story. Technology is undoubtedly changing the structure of business today.  Motley Fool columnist Morgan Housel, recently quoted a line that’s been going around on Twitter:

In 2015 Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba, the most valuable retailer has no inventory, and Airbnb, the world’s largest accommodation provider owns no real estate.

All of these traditionally non-tech sectors, media, transportation and hotels, are now being transformed by technology companies. You could add many more industries to this list. The problem is that 1) a lot of copy-cat tech companies that are not innovative or ground breaking are trading at astronomical valuations and 2) even for the best tech companies, with all the current hype, this is probably not a good entry point to invest.

In 1999 for instance at the peak of dot-com hype you could have bought shares of Amazon, now trading around $374, for around $86 per share. Not bad. If you waited until 2001, however, you could have picked up the same shares for less that $6. I would think that few early investors made it through that brutal 98% decline to capture the later gains.