Alchemy In The New York Times
by Tom Dyson
January 4, 2006
Welcome to the DailyWealth time machine.
Our first stop is 1980. We’ve just learned two Russian physicists have figured out a way to manufacture gold from lead. The cost of production is $600 an ounce.
An article in The New York Times tells us all we need to know:
"Alchemists have actually found a way to manufacture gold out of lead, and at commercial prices," claims an article from the January 20, 1980 edition. It goes on:
"A Russian physicist emigrated recently to Israel and reported, that before he left the Soviet Union, two former schoolmates, working at a nuclear research laboratory near Siberia's Lake Baikal, had happened on a way to make gold, and more importantly, to make it at a cost of $600 an ounce."
In 2006, most people would laugh at an article like this. But in January 1980, things were different. Stories like this were taken pretty seriously, even by the mainstream press. Gold was trading over $800… and still rising. Gold fever was rampant with investors.
It is true that lead can be turned into gold. The alchemist's theory - that one element can be transmuted into another – was vindicated by the discovery of the structure of the atom in the early 20th century.
American scientists in experimental physics have produced minute quantities of gold through particle bombardment in an 'atom smasher' - at a cost of around $60 million an ounce!
But to produce gold at a cost of $600 an ounce?
We’ll revisit this story in a moment… but right now we must hurry to July 1999. MP3.com is going public.
The investment bank in charge of the IPO has planned to offer the stock to the public between $9 and $11 a share.
MP3.com doesn't actually own any of the MP3 data compression technology from which the company borrowed its domain name. It’s really just a gateway for anyone interested in downloading music… an Internet portal. Advertising will generate the revenue.
Michael Robertson, the 27-year old CEO of MP3.com, started simply enough. He purchased the MP3.com domain, got a venture capital firm to fund him, and started meeting record companies.
At $10 a share, MP3.com would be valued at $500 million. “Pretty steep for a company that didn’t do much of anything,” says Andy Kessler in his 2004 book ‘Running Money.’
But this is 1999. Tech stocks are a sure thing. The investment bank upped the IPO price to $28, valuing MP3.com at $1.5 billion. Now the madness begins…
MP3.com has opened north of $50, and it will eventually hit $105. At this price, MP3.com is valued at $6.9 billion, more than most of the real record companies.
Doesn’t anyone realize this valuation is ridiculous?
We have experienced two wild scenes today… but what do Russian alchemists and MP3.com stock have in common?
These stories are both evidence of bubble tops. They are a symptom of the euphoric fever that spreads over people when a bull market reaches its climax. Investors lost their heads in 1980 when it came to gold; they were prepared to believe anything. The same thing happened with Dot-com IPOs in 1999-2000.
Both “fevers” caused massive investment losses.
Where is the fever, the potential bubble today? We looked for euphoria… and this is what we found:
In 2005, Donald Trump set the record for the most anyone has ever been paid for an hour’s work without a guitar. The Learning Annex paid Trump $3,000,000 to give a 1-hour speech at three different real estate investing conferences – one in New York, one in Chicago and one in Los Angeles.
But get this: He’s going to speak at the same three conferences in 2006, only this time, he’ll be paid $1,500,000 for each speech.
“One weekend can make you a millionaire!” says the conference promotional material. “41,000 attended our October 2005 Expo in New York. 46,000 attended our November 2005 Expo in Chicago. Over 58,000 are expected to attend our February 2006 Expo!”
The price of a ticket to see Trump speak is $179.
The Learning Annex goes on:
“Real estate prices have increased every decade for the past 160 years. That’s a fact! Haven’t started yet? Don’t worry, it’s never too late to start building wealth through real estate.”
Consider today’s letter a warning… the astronomical payments to Donald Trump and the rosy claims made by the Learning Annex will be just another footnote in the book of investments that fleeced investors who were late to the party.
Just ask those who bought gold in 1980 or tech stocks in 1999 how it all works.
Good Investing,
Tom Dyson
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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