NEW YORK (AP) -- This will probably be the year investors remember as the year of the great train wreck, a disaster involving perhaps more millions of people than any similar event in the past seven decades.
The ride began slowly, but neighbors told neighbors, and brokers told clients, that there was money to be made simply by jumping aboard and taking a free ride to wealth on the Stock Market Express.
It was called the momentum theory: If stocks were moving higher on rising volume, then it was safe to assume they'd continue doing so, providing quick profits for riders, especially if they boarded early.
You didn't need to know much more than the name of the company you put your money on. And you could ignore all the old rules of thumb, such as price-to-earnings and price-to-equity ratios. You could even ignore the balance sheet and the income statement. And if you did read the latter and found the numbers encased in parenthesis, signifying losses, you could ignore those, too!
You also could ignore people like Warren Buffett and George Soros, billionaire types who admitted they didn't understand what was going on. Of course, they didn't. They were Old Economy investors. This was the New.
And you needn't pay attention, either, that some companies were already selling as such premiums that it might take longer than a lifetime for the company to earn in a year the kind of money at which their shares sold.
Many of the new companies had big ideas about changing the world. Their zealous founders promoted their concepts to venture capitalists who packaged the ideas and presented them to the investment bankers. Meanwhile, hints of a fantastic new technology or daring concept made their way into the media, so that by the time the investment houses were ready to offer shares for sale, the public was salivating.
Momentum thus was programmed into the new IPO, or initial public offering of the company's stock, and it took off flying, maybe even doubling or tripling in a single day. How could investors resist?
While they didn't get in on first-day's prices, brand new investors took notice of the new companies that would change the world. If the train was moving and no ticket was required, why get left behind?
Trouble was, the train was moving on momentum rather than fuel: Small or perhaps no earnings, untested managements, poorly defined markets. Just big ideas and lots of hope, and sponsorship from well-known mutual funds.
Aiding and abetting were publishers of market letters who swamped the mails with subscription offers promising "the six stocks that will make you wealthy" or "the stock that even Wall Street knows nothing about." They sneered at the old buy-and-hold philosophy. Jump in, jump out.
The first indication of trouble came in March when the express train, now high up a steep mountain slope, suddenly lost traction. Wise investors jumped. But the loss of traction, though costly, wasn't enough. To million of small investors the promised land was still ahead.
The express never made it. Some of the very venture capital firms that helped initiate the hubbub jumped off at a profit. Lenders became wary. Big investors culled their portfolios. But those "buy" ratings persisted.
As momentum weakened month after month, the express slipped back closer to the valley floor from whence it began its trip.
Last Wednesday, the Nasdaq index, heavy with shares of newer companies, was stalled more than 50 percent lower than in March, and at its lowest in 21 months.
Its remaining riders, many of them enticed aboard by the chance for a free ride, and unwilling to do their own analysis, have paid a terrible price. That, however, may not be the totality of their tragedy.
Even worse would if they swear off the market altogether. Near, or perhaps at, the bottom. Which is where bull markets originate.
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