June 15, 2002

Wired Writes About the Crash of George Gilder

In the 1970s George Gilder claimed that feminism was going to destroy American culture and wreak psychological havoc on American men. He was wrong. In the 1980s George Gilder claimed that the Reagan Revolution was going to ignite an extraordinary wave of economic transformation. He was wrong. At the turn of the 1990s George Gilder claimed that the information technology revolution was going to be a big deal. He was right. In the 1990s George Gilder claimed that the "telecosm" was going to be the biggest deal yet, and make all his clients extraordinarily rich. He was wrong.

One for four is not a good record for a prophet. More important, perhaps, Gilder convinced people to bet real money on the "telecosm." And now they're angry and looking for a scapegoat.

Wired 10.07: The Madness of King George

The Madness of King George
George Gilder listened to the technology, and became guru of the telecosm. The markets listened to his newsletter, and followed him into the Global Crossing abyss. yet he's never stopped believing.
By Gary Rivlin

The lunch plates were cleared long ago, and the waitress gazes vacantly out over an otherwise empty dining room. But George Gilder, his legs propped on a nearby chair, seems rooted in place, not quite ready to leave. We're lingering at a restaurant down the street from his office in Great Barrington, a hamlet set along a rural highway that winds through the southern tip of the Berkshires in western Massachusetts. Here, one of the tech world's more famous - and controversial - prophets is contemplating how he could have been so right over the past half-dozen years and yet seen everything turn out so terribly wrong. A look of anguish clouds his face.

"I knew that it was going to crash, I really did," Gilder says, looking out a window on to Main Street. Since 1996, he has published the Gilder Technology Report, a monthly newsletter that in its heyday was arguably the most influential tout sheet on Wall Street. He glances my way and notices my arched eyebrows. I had plowed through several years' worth of issues, and while I read page after page of praise for a lengthy list of seemingly promising telecommunications companies, I saw nary a hint of warning in anticipation of the Nasdaq's March 2000 tumble and the financial tumult that followed. He adds quickly, "I told people in early 2000 they should sell half their shares in these companies." Then he says, in a tone of self-rebuke: "I didn't say it often. I didn't put it in a newsletter."

He made the recommendation to sell, he admits, only within the limited confines of the Telecosm Lounge, his online salon for newsletter subscribers. He fumbles for words, starting one sentence, then another, before growing uncharacteristically silent and staring off into the distance....

"If I had said, 'Hey, this is a top, you should all sell,' it would've been a cataclysmic event," he says. "I'd think about telling people that they should sell half their holdings, and each time I'd conclude that my subscribers would be enraged. I also wondered what I'd precipitate if I did it." Fully 50 percent of his readers had signed up for the report at what Gilder now calls the "hysterical peak" of the market. "Half of my subscribers would have been eternally grateful [for a warning], but the other half -†the new ones - would've been enraged because they had just come in," he says.

"It was quite terrifying. I really didn't know what to do."...

Of course, the ironic thing is that as far as the technology is concerned, it is not clear that Gilder is wrong. But what Gilder never told the subscribers to his newsletter is that rapid technological progress does not high profits make. Rapid technological progress coupled with massive barriers to entry mean high profits. But the lesson of the late 1990s is that--unless you are Intel or Microsoft--technological innovation is more likely to increase competition in your market segment than entrench your market position.

Why Gilder forgot to tell his subscribers this is unclear to me: he was writing a technology letter to educate his clients, not a stock-picking letter to part a herd of gullible subscribers from their money. Or, rather, he was writing a technology letter, until he and his partners fell into writing a stock-picking letter instead...

See this copy of Rivlin's article. Posted by DeLong at June 15, 2002 09:02 AM



>>"Half of my subscribers would have been eternally grateful [for a warning], but the other half -†the new ones - would've been enraged because they had just come in,"<<

Do I get this right? Is George Gilder *really* claiming that the reason he didn't tell his subscribers in March 2000 that they should sell was that he was scared that the new subscribers--the large number of new subscribers--would be mad?

What did he think they would be after they followed his advice, bought "telecosm" stocks, and watched them plummet?

Adam Smith

Posted by: Adam Smith on June 15, 2002 08:00 PM

> ... the ironic thing is that as far as the technology is concerned,

>it is not clear that Gilder is wrong. But what Gilder never told

> the subscribers to his newsletter is that rapid technological

>progress does not high profits make.

Your are exactly right, of course. Lots of people who had visions of steam railroads and horseless carriages transforming the future lost their shirts in the shakeouts that followed the overinvestments in them.

If you want to make money this way as an investor you need two crystal balls: one to pick the innovation that will change the future, and another to pick the particular company that will happen to make money off it -- say, which of the 400 car companies of 1913.

Another argument for a boring old diversified portfolio for those of us who don't have even have a working ouija board.

Posted by: Jim Glass on June 15, 2002 10:31 PM

Or even for those extremely few of us who do. The venture capitalists and the investment bankers are as anxious for diversification as any of the rest of us.

If I'm reading what Gilder says correctly, he found himself frozen because he believed that his newsletter moved stock prices--and hence that if he warned of a crash, he wouldn't be forecasting a crash, he would be causing a crash...

Brad DeLong

Posted by: Brad DeLong on June 15, 2002 11:02 PM

I have one ironbound rule as regards investing; never follow an ignorant fool. It follows that I have (at least) one ironbound rule for determining an ignorant fool; anyone who denies scientific reality.

George Gilder aligns himself with those who deny the scientific reality of evolution, intending to replace it with the creationist stalking horse of "Intelligent Design" (see http://www.discovery.org/viewDB/index.php3?program=George%20Gilder%20Archives&command=view&id=19 and Gilder's leadership position within the Discovery Institute itself [see http://www.discovery.org/crsc/ and http://www.discovery.org/fellows/discoveryFellows.html])

I am a professional in a highly technical field, ironically one in which Gilder has identified a competitor as being a shining example of his telecosm. Any person applying to work for me in this field who, for example, denied the usefulness of differential calculus, or believed that the weather was the work of gods moving in the clouds, would naturally not be considered as a viable applicant.

Why would anyone make an investment based on the opinions of someone who denies some of the fundamental assertions of modern science? On what basis do you think Gilder makes his claims, of he "doesn't trust" basic science?

Posted by: Jon Gallagher on June 16, 2002 12:56 PM
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