The Morning After: Is It All Over but the Shouting?

NEW YORK â€”  The headlong gold rush in technology investing is waning. It isn’t just that the tech-heavy Nasdaq index has fallen almost 30% in recent weeks. Rather, the whole pipeline of technology finance, including new IPOs and venture-capital investments, has backed up. In turn, this means the tech subculture, from 21-year-olds expecting billionaire status to casino-like day trading, will moderate. That is a welcome development. Continuation of the tech mania would ultimately have meant a far bloodier crash landing.

Still, the adjustment may be painful. We may see considerable layoffs among younger technology companies and their suppliers, numerous business and personal bankruptcies and the puncturing of many dreams. This dry spell may be long: Just as investors overreact on the upside, they do the same on the downside. But better to get on with it now.

The good news is that the new technology-driven economy is here to stay. No stock-market downdraft can roll back the information revolution and its long-term economic benefits. Jack Welch, the revered chairman of General Electric, is right to describe the Internet as the most profound business development in 100 years. It will bring Americans even higher standards of living and productivity, more work mobility and better education systems and medical care.

Are we sure the long-expected correction in technology stocks is at hand? No. Markets never afford certainty. But the Nasdaq index has already fallen nearly 25% from its March high. This fits the definition of a bear market.

Even if the Nasdaq recovered, it is the IPO boom that has been driving the tech culture. But those crazy days when scores of companies went public every month, saw meteoric gains in share prices and created new groups of millionaires everywhere are not coming back soon. Right now, the dollar amount of IPOs is down 75% from last month’s level. When it contracts like this, the change usually extends over a long period.

Yes, many don’t understand why such corrections are healthy. But they have either forgotten or never knew the relevant lesson of financial history: Market bubbles arise periodically, are never indefinite and usually end harshly. The longer they last, the more destructive their consequences.

We have seen this cyclical phenomenon many times. The conglomerate stocks of the 1960s and the electronics stocks in the early 1980s are both direct parallels. Even more applicable was the Japanese stock market of the early 1990s. There, even the multiples on mature company share prices reached astronomical levels. For a while, investors convinced themselves that Toyota and similar companies deserved to sell at 100 or more times earnings. (Despite record profits, General Motors and Ford today sell at around 10 times earnings.)

But like the other manias, there was no true rationale for such prices, and the bubble burst. The Tokyo market lost two-thirds of its value--a true crash--and, 10 years later, has recovered relatively little of that loss. Now, investors look back in bewilderment at the Tokyo market’s peak, wondering how it could have happened.

There will also be social and cultural benefits to this tech-market correction. A dangerous gold-rush mentality had developed among young professionals. Just draw up a dot-com business plan and dive into any of the technology communities around the country. Almost overnight, you’ll be fabulously successful. Yes, some found gold in 1849, but most who rushed to California came up empty.

Examples of social distortions abound. Many younger people skipped graduate school or even dropped out of college to join the gold rush. Others abandoned promising jobs in good companies or in academia on just a wing and a prayer. Such respected employers as Goldman Sachs Group or McKinsey & Co. couldn’t even find enough entry-level candidates to interview. There was no sense of history or market cycles because young people have had no experience with them.

These patterns are unhealthy because they raise false expectations, then cruelly dash them. The longer the gold-rush mentality lasts, the more people ultimately wash up on the beach. From bankruptcy, to divorce, to psychological crises, the damage is severe and hard to recover from. Just ask those who went through the Wall Street busts of the early 1970s and early 1980s, when firms were practically throwing employees out the windows.

Ultimately, the correction is also good for the technology-business sector. Some business practices were quite foolish: for example, spending all IPO proceeds on advertising for a me-too dot-com brand and assuming that consumer traffic would automatically result. Practices like these are why 90% of Internet retailers are projected to go out of business.

No one wins from running businesses this way. Consumers who have bad experiences with such companies will be reluctant to do business with others like them. Suppliers, including advertising agencies, will be burned and shun them, too. Once such companies implode, it will takes much time before investors look at similar ones again.

Finally, this correction is good for individual investors. The spectacular gains of the past two years produced a gambling, “no-lose� mentality in many people: Just buy a tech stock and watch it go up. Some committed life savings to such investing. Others had never invested in stocks before. Having now experienced the sting of losses, many are shocked or remorseful or poor--or all three. But at least the lesson came without a true crash.

In recent weeks, as the Nasdaq market plunged, it has been politically correct for tech leaders to describe this change as healthy. Many are saying, in effect, they’re pleased at the fall in their apparent wealth. Is that credible? No. But it is the right reaction. *