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Why Some Bubbles Burst

August 7th 2015

When GoPro went public in June 2014, the indicative price was $21-$24 per share, valuing the company at $2.95 billion.  On the first day of trading the shares moved up 30%.  The next day it was 14%, the next 13%.  Within a week it had doubled it’s share price.  By October, the price was $94.  Forbes commented that GoPro was “unstoppable”.  Nick was worth near $3bn.  He sold some shares and bought a Jetstream.

Then the unthinkable happened.  The share price started to fall.  By March this year, they had fallen back to less than $38.  So what went wrong?

In hindsight, it turns out that there are two issues.  One factual, one emotional.  Sanity and insanity.  The factual reason is that much of the hype around the escalating share price was the expectation that GoPro could build a whole worldwide community around the camera, with individual users sharing content and experiences.  Digital ecosystems are all the rage and so investors targeted this new player.  Of course, it’s a very (very) crowded market, the GoPro community never took off and expectations were dashed.  To give Nick his due, the IPO price was about right, but the market then went it’s own way.  The same thing will happen to others (look at Fitbit).

The emotional one is the herd instinct – no one wants to get left out.  Whether it’s escaping a predator or joining in a feast, we’re still partly hardwired to do what we think the best of our group is doing.  When individuals hear that the price of GoPro is going up they get on to their investment managers and a vicious circle begins.  And it’s institutions too.  Business Insider is talking about an “investment frenzy” with special purpose vehicles being put together in just a couple of days to get in on some deals.

The risks are obvious.  The lessons are the same.  Take a cold, hard look at every investment.  Go Pro is now at $64, in line with original guidance.  So it’s a good news tech story in the end.

It’s just a matter of distinguishing between something that was designed to work in bubbles in the sea and an actual South Sea Bubble.

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