Facebook's $1 billion purchase of Instagram, along with the social networking site's own forthcoming $100 billion IPO has many wondering if we're witnessing a bubble.
In the days following the deal, the New York Times asked "Is This the Sound of a Bubble Ready to Pop"?
A columnist at The Industry Standard, itself a product of the 1990s tech boom, didn't mince words, saying, "The tech bubble is getting dangerously close to popping."
I couldn't disagree more.
The psychology of stock market bubbles has been widely analyzed, the most widely referenced text being Extraordinary Popular Delusions and the Madness of Crowds published by Charles Mackay in 1841. Because investments change, but human nature stays the same, the salient elements of a bubble remains the same regardless if it's tulip bulbs in 1637 or WebVan in 2000.
Today's market completely lacks the magical thinking and irrational euphoria that defines a bubble.
Bubbles are noted by madness, not high prices and rich buy outs. In the midst of one, instant wealth occurs all around, not only for established companies like Instagram (which boasts 35 million users) but for anything even remotely connected with the popular narrative of the time.
It's why in the midst of the 1990s tech bubble, companies suddenly began separating their "dot com" units to be separate, publicly traded entities.
In 1999, brokerage Donald Lufkin and Jeanette (now a unit of Credit Suisse) issued $346 million of stock tracking DLJDirect, the firm's online brokerage. Walt-Disney (DIS)
Carved out of Barnes and Noble (BKS),
The best example can be found in the now delisted K-Tel , a "oldies" record publisher whose stock more than doubled in a single day back in April of 1998 when the company announced it was expanding sales to the (then novel) Internet. Amid the euphoria, the stock climbed 925% in less than eight weeks time. That's a bubble.
That's certainly not the case in today's supposed tech bubble, with recent tech IPOs like Pandora (DMD),
Facebook's acquisition and current pre-IPO valuation of $100 billion itself might end up in hindsight as being too high or perhaps not. Amazon.com (AMZN),
In reality, calling a market a "bubble" isn't an observation, but a smear. It's a tacit, passive-aggressive way of dismissing price action as irrational and without merit. Nobody thinks their own investments are in bubbles, only the other guy's. Denigrating a market becomes a self-defense mechanism; shielding our egos from admitting the reality we've missed an opportunity for profit. It's Alfred Adler's superiority complex in financial form.
But even more than valuations or soaring stock prices, bubbles are characterized by complete abandonment of rational perception in exchange for the thundering herd.
In a bubble, people honestly believe that "old standards do not apply" and that there's no danger of loss. The current skepticism within technology media, which was largely the cheerleader of the 1990s NASDAQ, aptly demonstrates how no tech bubble exists. If it did, it wouldn't be called a bubble.
I was actively trading throughout the excesses of the dot com bubble. I met with executives at Internet darlings like CMGI (MLNK)
One highly valued but income deficient Internet company I worked with in the 1990s often took local freelancers to elaborate dinners in Chicago's best steak houses. I've never eaten as well as I did in 1999.
The point is that there's a difference between a bull market, an expensive acquisition, or a hot IPO -- and a bubble. This is no bubble.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC