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The tech bubble question

Are we in another tech bubble? Who knows. The real question may be why more investors aren't asking questions.

Kai Ryssdal: Never fear -- Apple's back. After a big sell-off the past couple of days, shares were up hard today, back over $600 a share. Here's another recent number from tech land: A billion dollars. That's what Facebook's paying for Instagram, that crazy popular photo app with -- it must be said -- no profits. And millions upon millions more are flooding into all sorts of other tech startups and apps-of-the-moment.

Can you spell 'tech bubble'? Marketplace's Queena Kim reports.


Queena Kim: Here's the thing. We won't know for sure if we're in a tech bubble, until it bursts. And since Silicon Valley has yet to invent a time machine app, it's still an open question.

Alex Field, an economics professor at Santa Clara University, says history has shown us that there are signs.

Alex Field: The kind of thinking that well i don't think this valuation is particularly justified but everybody else seems to be thinking that way and therefore if I buy this and sell it subsequently, I'm going to make money.

In other words, leaving behind your critical mind and going with the crowd. Field doesn't think we're in a tech bubble yet.

Field: You know the Nasdaq peaked, I think it was in March of 2000, at over 5,000 and here we are more than 10 years later and we're not even close to that.

And unlike the last time around, he says the environment in Silicon Valley is very different now. Companies like Apple, Google, Facebook are making tons of money. Unlike, say, the flameouts of the last boom. Remember Pets.com?

Henry Blodget is a former tech analyst who got fined for his part in inflating the bubble the last time around.

Henry Blodget: I think if you're asking if any particular investment is a bubble or was stupid you have to look at it within the individual investor or the company that's playing the price.

Unlike the rest of us, venture capitalists are laying down chips on companies knowing that most of them will fail. But says Alex Field, the economics professor, given the climate the media frenzy surrounding stories like Instagram, that's hard to do.

I'm Queena Kim for Marketplace.

About the author

Queena Kim covers technology for Marketplace. She lives in the Bay Area.
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Why is it different this time? Because all of the venture capitalists remember how much money got flushed down the toilet last time, and aren't eager to repeat the experience.

The philosophy during the Tech bubble was "just focus on capturing market share, we'll worry about profitability later". Eventually, "later" arrived, but profitability still hadn't shown up yet, so the bubble burst.

Sure, some of the "flagship names" of the current Tech wave are extremely overvalued (Facebook, Groupon, etc), but as our friends at Marketplace have mentioned a time or two in recent weeks, others (like Apple) are still considered very good buys (even at $600+ a share) based on their P/E ratios.

With Facebook in particular, a lot of people are going to lose a lot of money when that finally goes IPO, because unless you're one of the privileged few who have stock (or options) set at the pre-IPO price, you won't make nearly as much off the stock. You'll have to buy at (pumped) post-IPO prices, then ride out the post-IPO crash (dump) before you'll see a positive return again.

Unless it's your full time job (or at least a 10 hour/week hobby), picking individual stocks is a sucker's game anyway. Far better to go with an index-based mutual fund with low expense ratio, any maybe mix in some small-cap / foreign-investment mutual funds if you want more risk / higher returns.

Oh yes, Silicon Valley just looooooves to croon, "It's different this time." NOT, NOT, NOT!! Explain again how FaceBook is different from Pets.com. Explain again how Microsoft, Cisco, Intel were not making tons of money in 2000.

And Marketplace says Facebook is really different and worth $100 Billion because...because...because...Complete that sentence and I'll belive you.

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