The Gilder Effect
(Reprinted from the GTI of May 9, 2003)

The Gilder effect is only a memory, and we're
unlikely to see it again.  But in its day, this is
what it looked like:

As you can see, XLA had been treading water,
but the day it made the list, it jumped from 32
to 48.  Two days later it closed at 68, and soon
it was flirting with 100.  The daily volume,
which had been averaging 100,000 shares,
rose to 1,000,000.  All this because George
gave it his OK.  Such was the Gilder effect.

Though exciting and at times entertaining,
the Gilder effect caused great distress to us
subscribers, because it radically elevated the
price of the stock.  An investment that might
have made sense before the report came out
was overpriced before we could get to it.

Was this somehow George's fault, perhaps
caused by his tendency toward excessive
enthusiasm?  Not at all.

The Gilder effect came to pass because
George was extremely successful at what
he had set out to do, which was simply to
write a monthly technology report with an
emphasis on investment opportunities.

Over time his audience grew in size and
enthusiasm.  When he added a stock to the
list, we rushed out to buy it.  That moved the
price, especially if the stock was thinly
traded.  Then non-subscribers heard about
it and got into the act, and it all became a
mushrooming, self-fulfilling prophecy.

If the prices became ridiculous, that wasnít
Georgeís fault.  Blame buyers who ignored
the fundamentals.

Some said, especially after everything had
collapsed, that George had been "hyping"
his stocks.  Thatís absurd.

I don't know George personally, but I know
him pretty well from the Gilder Forum, I've
heard him speak, I've read his books, and
I've followed his career for many years.
It is clear to me that he is a man of integrity
and honor.  Don't be fooled by the Professor
Harold Hill marketi
ng program foisted upon
him by his partners at Forbes.

In any event, George
had nothing to hype.
He wasnít selling anything, other than
subscriptions to his report, and the growth
in that area -- because of the quality of the
reports -- was just fine.  Otherwise there'd
have been no Gilder effect in the first place.

Moreover, I don't happen to agree that
stock prices were absurd, or that there
was a bubble in the market.

Such judgments are facile after the fact,
once everyone knows how things are
going to turn out.  But at the time, there
were alternate scenarios, under which
there would have been no recession, and
the boom would have continued, for
example:  if the dotcom business model's
reliance on advertising had worked out,
as it had with radio and television; if the
broadband rollout hadn't been handcuffed
by red tape; if the Fed hadnít raised
interest rates; and so on.

Hindsight is 20-20, but investors have to
make their bets in the real world in real time.
The market's track record of successfully
anticipating economic trends way before
the talking heads do is legendary.  This
time the market lost its bet.  Sometimes
the favorite loses the race.

But don't blame George for not seeing the
crash coming.  No one else did either,
except for a few crotchety old Perma Bears
who'd been predicting it without stop for
as long as anyone can remember.

A personal odyssey:  I placed a market buy
order for XLA shortly after the report was
posted online, pleased with myself for
acting so quickly.  The ask price was 34,
but before my order could be filled, trading
was halted.  When it resumed, my order was
filled at 50, so it cost me a lot more than I'd
expected.  Indecisively, I stood pat for a
while, luckily with the price going up the
whole time, until Debbie convinced me to
reduce our ever mounting stake in XLA.
We sold half our shares at 96, which left us
owning the rest at a negligible cost.  Which
was appropriate, since in time the shares
had negligible value.

What did I do with the gain?  Don't recall,
probably bought GSTRF and GX.