Perhaps I'm being cynical, but I suspect that part of the reason Facebook's recent investors have accepted such a ridiculous valuation is that they expect the everday ubiquity of Facebook to drive a flood of dumb money into Facebook after the inevitable IPO.
Someone is definitely taking that attitude. I bet on Goldman Sachs when this came up a while ago, describing their actions as 'Pump and Dump', but there's no reason their customers couldn't be doing the same. The problem is that we've then very clearly got the first two layers of a bubble pyramid, and the roadmap for the next crash becoming all the more clear.
Honestly, some days I do wonder if we wouldn't be better off as a society radically restricting the operation of the various investment markets. The current system seems almost designed to create financial instability through irrational exuberance, deliberate bubble creation and wild crashes while they work out how to build the next house of cards...
In the dot.com bubble, it felt to me like the opposite was taking place: a lot of very rich people pumped a lot of money into startups, some of it in turn transferred to engineers and other employees and from that into, say, restaurant tips.
I was living in Tel Aviv at the time and you could almost taste the sudden influx of wealth into the city's economy.
A bubble isn't bad, if you're careful not to buy into it. It's a great time to launch or upgrade a career, and acquire skills, contacts and even savings that will last you a long time, especially through the inevitable bust.
Sure, it feels great when it's in bubble phase, which is kind of the whole point.
I was in Ireland just before the last bust and all my cousins and aunts would be dispensing pearls of wisdom such as "you never lose on the housing market in Ireland", and "My house is worth 700K. I'm RICH!".
Bubbles are by definition Ponzi schemes, and when they bust someone is going to be left carrying the can. That's usually people who a) Had some money beforehand (or are now massively in debt) and b) aren't the most astute investors.
I'm not, by any means, suggesting bubbles are a good thing. I'm saying they're a fact of life in this field, so people working in startups should know how to deal with them.
If you can maintain a level head in a bubble (ie, the opposite of the approach you heard in Ireland - and I often heard in Tel Aviv) you can survive it, and even gain from it. I'm talking about the startup engineer case, I don't know anything about the investor's case.
So don't participate in the financial markets. At the moment there is a lot of money chasing very few good bets. Figure out a way to be a good bet, and rake it in.
Isn't there a direct contradiction between not participating and "finding a good bet and raking it in"?
EDIT: Also, I'm not sure "not participating" works anymore. The last bust was not paid for by people gullible enough to buy into it, but by government debt. In the long run that means it will be paid for at least in part by inflation (which again hits people with savings).
I just re-read your comment and realised I read "find a good bet" where you wrote "be a good bet". That's actually great advice and my previous answer makes no sense now.
If the financial companies actually went bankrupt, instead of getting bailed out, when their schemes unraveled, they might be a bit more careful about what they do. And the same goes for their investors.
Which is why we need a return to separation between retail and investment operations; a retail bank with a significant proportion of the market going bankrupt causes enormous problems for everyday customers who really aren't well placed to hedge angainst and cope with that risk.
Nothing cynical about it. I'd say you are 100% correct.
All classic stock hype relies on the greater fool theory. People who are 'in' now know there are probably 1,000,000 fools lining up waiting. Apart from disaster their investment is locked in and waiting for maturity.
