Are You in a Bubble?

The investment gurus seem to have fine tools. They can pinpoint exactly where you are in the various stages of a market cycle. Consult the tony financial-information sources and you can find there, on any given day, a heavily credentialed analyst who thinks you are at the front end of a powerful secular upsurge. The problem is that you can find nearby another, equally credentialed analyst who thinks you are at the precipice of a steep, wealth-crushing plunge. Those fine tools seem to produce different products in different hands. And they leave unanswered the only question that really matters to you and me, “Are we in a bubble?”

Over the long course of my entrepreneurial life, I learned to work around, if never to master, the fine tools of financial management. But I found that I could usually feel a bubble coming on.

You never forget your first time. In the late Nineties, I owned, with two partners, a widget company. We sold to larger manufacturers, not to end users, and as a result we were just a dot somewhere along somebody else’s supply chain. But we made good widgets, and we could compete with the Vietnamese and the Chinese, if not in production costs then at least in transportation costs, as we sold into the domestic U.S. market.

Ours was a small, solid company, usually showing mid-single-digit growth on the revenue line, high single-digit margins on the profit line. I was the strategy guy, and, while I was pretty good at starting, growing, and selling companies, I was too impatient to manage a plodding and utterly predictable enterprise. One day, when I probably should have been working through a list of overdue receivables, I began noodling a company restructure. I soon had a rough design to split the company into two parts — one to be an old-line widget company, the other to be what might plausibly be packaged as a dot-com. You remember the proposition from those days: putatively rising revenues powered (conceivably) by broadband technologies; no visible profits but incalculably bright prospects. I made a few calls and excited what appeared to be a real offer for our carve-out dot-com. (It was that kind of a market. The apposite term would be “frothy.”)

I took my partners out for a steak dinner and ordered a nice California cabernet. I told them of my idea and why I thought we should pursue it. My basic argument was that the market, for whatever its indecipherable reasons might be, had a ravenous appetite for dot-coms and no interest whatsoever in a fine widget company.

My partners — in roles that always seemed to be self-assigned by the two other guys in a three-way partnership — were Mr. Gloom and Mr. Boom. Gloom saw the glass almost bone-dry. He stayed awake at night trying to decide which of our many competitors would invent a better widget and drive us out of business. He was for selling the carve-out for whatever we could get for it and then digging a deep moat around the legacy widget business. All he wanted personally was enough of a payout to buy a large boat and to park it in front of a large beach house on the Delaware shore.

Boom saw the glass full to the brim. The legacy business, in his view, was on the brink of a breakout, with the dot-com component sure to fire up the afterburners. He saw no reason to sell unless we could attract a knockout price. As for his personal ambitions, he wanted to buy all of the houses on an exurban road in Maryland and then rename the town, quite possibly for himself. (Boom was a competitive sort. His grandfather had a town named after himself somewhere.)

I retrieved two business cards and a ballpoint pen from my jacket and, after passing them across the table, asked Gloom and Boom to write down an acceptable price for the sale of the dot-com. Gloom set his price at X, Boom at 3X.

I waved the waiter over and ordered a bottle of a conspicuously overpriced Bordeaux. With some ceremony, and anticipating the likelihood of a sitting ovation, I announced that we had received a firm offer for 5X. For an exuberantly irrational moment, I feared that Gloom was going to kiss me. Even Boom began to chortle as he swigged overpriced wine. That moment, in hindsight, proved to be the summit of my career in the widget business.

As the evening wore on, Gloom began to celebrate excessively, and Boom began to find flies all over the ointment. Big, intransigent flies. By the time we closed the steak house that night, the three of us were deadlocked 2–1 for the sale, with unanimity required for what was clearly a material transaction.

The three partners then commenced, as they say in the U.S. Senate, an extended colloquy. It was long and loud and contentious. Three exhausting days later, I took a call from the prospective buyer. He appeared to have misattributed our silence to the possibility that we had opened negotiations with a third party. He wondered if he could submit an improved bid. It thus became my solemn responsibility to take down the details of his new bid without bursting into convulsive laughter.

When I reported to the partners that we were now the proud owners of a dot-com worth 6X, Gloom got that amorous look again, but Boom was enraged. For him, the new bid was confirmation that I had grossly undervalued our asset (which, only a fortnight earlier, those of us with long memories would recall, had been valued by the partnership at zero).

It was just about then that the dot-com fever broke. All of those heavy-breathing buyers who had rushed into the space only months earlier seemed to have received the same memo: Now, they all wanted to rush out of the space. If you opened your office window, you could almost hear the air hissing out of the balloon. Whoosh. We three widget-makers were lucky, just plain lucky, to close on the sale at 2X.

It’s been a quarter of a century now. Gloom regards me as a warm and avuncular presence in his life. He sends me holiday greetings from the Delaware shore, where he owns a house almost as large as the one down the beach owned by a government employee named Joseph Biden. Boom no longer speaks to me. I’m told that he still thinks I dashed his chances of becoming mayor of Boomville. It seems to have made no impression on him that, 18 months after the acquisition of our dot-com, the new owner went bust.

And that, my friends, is how it feels to be in a bubble.

Are you in one now?