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RHAT: Sharks and Geeks, July 18, 1999 :: Ben Turner's Soapbox

 

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archived soapbox: July 18, 1999
"RHAT: Sharks and Geeks" [permalink]
    keywords: stock market
    soapbox #: 196
    written: July 18, 1999
    words: 2635

"RHAT: Sharks and Geeks", an Essay

I wrote this on July 30th, a little later than the publishing date. That detail might help, considering both the key events discussed in this Soapbox happened after the week of July 18th.

Today the Dow Jones Industrial Average dropped about 181 points and the NASDAQ index dropped 66 points. The lows for the day were much lower. Over the last two weeks, there has been significant bloodletting in the US market. Things look to go much lower.

Meanwhile, Mr. Mark Barton entered a daytrading firm in Atlanta yesterday and went on a shooting spree, killing quite a few people. I'm not going to say that Barton couldn't take such huge losses in the market, since that's the kind of mental leap the media is supposed to take credit for, and also since daytraders shouldn't care whether stocks go up or down -- all they care about is if a stock moves up or down QUICKLY. You can make money in either direction. Maybe he lost a lot of money, but if he were any good at daytrading, it wouldn't be simply because the market was DOWN huge.

Obviously the guy had a ton of other problems in his life. Some FBI profiler said he killed his family to hide the shame of his financial worries. Well, whatever. Didn't sound like he was doing THAT badly. The results of all this are Atlanta's feeling sorry for itself, a bunch of families lost people very dear to them, the media has a new story to suck dry after JFK Jr. wore off, and daytraders and average Joes like you and me are going to be targeted by the media and by the organizations operating on the stock market as people they don't think should be investing, etc. etc.

I have neither the capital nor the tools nor the experience to daytrade, but I do watch daytraders operate. Most DO lose money, but what do you expect? The market is vicious and it will take ALL your money if you don't know what you're doing. You have to be more vicious than the other guy out there. I can't even imagine what delights fill the heads of the money managers and specialists and market makers. All the dirty little tricks they've picked up to collect naive peoples' money... I'd like to be so savvy as to be able to daytrade successfully, but that's years off. But it's interesting to see right now how daytraders are reacting to being taken seriously by the media finally, and to being accepted as a legitimate force on the market.

So...newbies... Well, I'm still very much a newbie. Yes, I've lost my money. But I'm getting signs of encouragement from myself that I'm finally learning what I should be doing. For instance, I don't own any large cap stocks right now, which will probably undergo heavy losses before this is all over. (or, at least, so I hope...) I'm picking my spots better.

I check Slashdot.org (henceforth /.) every once in awhile, since it usually has interesting tidbits around the 'Net about online activism or the open source movement or the latest tech or that sort of thing.

As basically everyone knows who knows anything about Linux and who keeps up with the huge movement, Red Hat, a company that distributes Linux in retail stores and free over the 'Net, is about to offer stock shares to the public in order to raise capital, under the symbol RHAT. For some perspective, there are many other Linux distributions, like Caldera and Slackware, but Red Hat's regarded as the most friendly towards Linux newbies. Which isn't saying much if you ask me. :)

Naturally, this is a HUGE IPO (Initial Public Offering) that everyone wants a piece of. No doubt it will soar on the day it debuts. Everyone wants Red Hat stock because it's a play on the extremely popular Linux movement. Plus, it's a 'Net IPO, part of the corrupt lot of IPOs that shoot up quickly, earning the smart traders megabucks and wresting away what little cash smalltime traders have managed to scrounge together.

Red Hat decided to invite open source developers who had contributed to its Linux distribution (presumably through donating code and debugging it and generally being supportive) to buy RHAT IPO shares through E*Trade. E*Trade is probably one of the most well-known online discount brokers, even if its services are half-rate and it's slow and most experienced investors call it things like E*Turd and etard. E*Trade competes with companies like Datek Online and SureTrade and Discover Online Brokerage. It's clearly the most visible of the lot. The deal was that Red Hat would give IPO shares to its contributors BEFORE regular IPO shares were handed out to everyone else. Not bad, eh? Quite generous.

What E*Trade is useful for is the fact that it's often involved in companies' IPOs. It's given shares that it gets to distribute to its clients if they indicate interest in buying. In other words, it's one of the few places a regular schmuck who doesn't have a huge portfolio or a good relationship with the brokerage can go to get shares of an IPO. Of course, EVERYONE knows E*Trade offers IPO shares now, so it's getting more and more difficult to GET IPO shares through E*Trade, since they only have so many to give.

So when a bunch of open source people, who are probably young, who don't have HUGE gobs of money to invest, and who have virtually NO investing experience try to sign up with E*Trade to get RHAT shares, you know there's going to be plenty of bitching.

At this point, you need to go visit the link below, which is the message board on /. discussing peoples' experiences with RHAT shares and E*Trade. I recommend reading all the posts if you have time. It will provide necessary context for the rest of this 'Box:

Barred from Red Hat IPO?

I laughed out loud when I first read the messages. What is basically happening is something we can see in one tangible place -- people with no experience with investing clashing with the jaded, greedy stock market.

The posters who are complaining have argued that they were excluded from being eligible for the Red Hat IPO because of E*Trade's questionnaire that you must fill out in order to be considered for IPO stock. The questionnaire tries to weed out people who shouldn't be participating in something as volatile and financially risky as an IPO. New investors are more often than not going to lose money on an IPO so E*Trade makes people fill out this quiz to protect itself.

Well, of course, the open source users objected to this sort of discriminatory, unfair treatment. In fact, their reasoning wasn't that bad. Red Hat invited them to participate, and obviously most of them won't have trading experience, so how can they pass E*Trade's questionnaire without filling it out dishonestly? Most were quick to acknowledge that it wasn't really Red Hat's fault -- Red Hat just wanted to give its contributors a special opportunity to receive a reward for their help by getting IPO shares before anyone else.

Many posters bitched about how E*Trade unfairly denied them, about how it wasn't feasible for them to open an account in time for the RHAT IPO, which is coming soon. Eventually, they began complaining about how unfair and unjust the stock market is after others posted how stockbrokers scam their clients and how there's a lot of kickbacks to wealthy, preferred companies.

Well duh.

It's one thing to catch the headlines of your favorite news site to see what's happening with the stock indices. It's another thing to learn firsthand how selfish and greedy the market is. It's all about money. Corruption is rife. The more money you have, the more money you will accumulate, the more your broker wants to keep your business, the more special stock offers you'll receive.

And then here come the naive-at-heart open source programmers and supporters who have never invested before and are surprised at what they encounter. Alright, I have to go with their side on this one -- certainly the stock market needs a fresh injection of people who have different perspectives to come in and weed out some of the ugly things that happen on the stock market. Brokers and companies are basically luring in unsuspecting new customers by promising them they can win the equivalent of the lottery. It's a Las Vegas kind of attitude with the advertising.

Maybe all these new open source people investing in Red Hat will pressure E*Trade and other brokers to clarify their legal restrictions and forms. It's already happened -- because of the backlash against E*Trade, E*Trade has relaxed its requirements for RHAT IPO shares so more developers can get in on it. This is a good thing. It doesn't seem to me like investors have many individual rights when it comes to the stock market -- one post on the Slashdot board remarked that even IF you had evidence that your broker was shaving points off your buys and sells, it would be very difficult to recover the lost earnings even through arbitrage, which is how those matters are supposed to be settled. On the market, you basically go with the flow or else you get sunk. And no one else cares either way.

But what's most important is that this shows just how inexperienced and naive the open source movement is. Did you read one of the first posts? "What about an open source stock broker?" Is this just reflexive? Apply "open source" to ANYTHING? I could see some benefits perhaps to making a broker's software and client's software open source, but how much would it actually CHANGE things? Open source doesn't seem to empower the client very much -- the main issues are still whether you're getting what you actually wanted to pay for, and whether you get it WHEN you want to get it. Does it? Correct me if I'm missing huge advantages to open source stock brokerage software.

I myself have been skeptical of how successful the movement can be. Sure, it's supposed to topple Microsoft and software makers by providing cleaner, more efficient, free programs to run systems with. I think the model definitely works better when source code is free for everyone. Microsoft has one of the most closed systems out there and you can tell, just from the stability of its programs (which is to say, abysmal), how well that system works.

But let's be realistic. Programmers certainly don't know how to cater to less experienced users. Just read the user manuals. I myself never got further than the Red Hat hard drive partitioning because the manuals were useless and I had no one around me to assure me I wasn't going to delete all the data on my free partition. Programmers don't know much about marketing or PR or financing or investing or management and so on. The open source movement is going to have to hire a bunch of outsiders to come in and help them acquaint themselves with the real world. It's not like Microsoft will be toppled overnight by Linux, if it's toppled by Linux at all. Linux has such a long way to go before it will be completely legitimate.

I hope that happens, but it's basically a rabid bunch of advocates doing most of the PR work, pushing and shoving their way around trying to get people to notice when few want to listen. In many ways it resembles the Apple advocate mindset, which looks down upon all outsiders as ignorant and stupid. If you're not smart enough to install Linux, then you shouldn't be using it. That sort of shit.

Of COURSE Windows is the most popular OS. Look at how well Microsoft markets and popularizes the damn thing. They get people to pay hundreds to thousands of dollars because they've convinced them that without Microsoft, they can't do ANYTHING. Sheesh, that was even one of the key lines out of "Pirates of Silicon Valley", that Bill Gates and Steve Jobs movie on TNT. Linux advocates stare slack-jawed and wonder why Microsoft isn't keeling over to some obviously superior OS.

And as for Red Hat, how good a company is it anyway? It's basically got hype going for it right now. But what happens when Linux companies are numerous on the stock market? Red Hat won't be the only player out there, and it will face vicious competition. Come on -- how does Red Hat make money? It makes $70-$80 or so on each purchase of Red Hat through the stores. Even if Linux is supposed to be free under the original license. You can download it for free, but who wants to download that over their modems?

Red Hat shares Linux distribution mindshare with quite a few other competitors. Besides retail sales, how exactly does it plan to make money? Will it offer advertising on its web site as it expands the site into a community portal? What? Could someone please tell me how else they will generate income? RHAT may go up a lot the first day, but it's going to lose a lot of its value, much like MP3.com (MPPP) did when it debuted. MP3.com was the first MP3 play, and it tries to sell albums of little-known bands to people, even though it lets people download the MP3s of the artists for free. Hello? Why would I pay for an MP3? Why would anyone else? MP3.com IPO'd at $28 and opened up publicly at a much higher price, maxing out at $108 before it sank the rest of the week and this week to what it's at now, $38. That's what hype does to an IPO. MP3.com isn't WORTH anything. How much is Red Hat worth? How much can ANY Linux company be worth under current models? They'll have to be profitable in many new ways to survive.

I'd like RHAT shares. But I'd sell them almost as soon as the stock debuted, for a nice profit. And then I'd watch it sink just as dramatically as it rose, maximizing profits. But what about the people who don't know what IPOs tend to do their first day? They will put together whatever they have into Red Hat shares and then they may lose most of it in a matter of hours. How will they react to this?

How will open source react to the stock market? How will the stock market react to open source? How will the computer industry in general react to open source in the long run?

This will definitely be one hot issue to watch. Let's just hope not too many people get burned.

And if I have to read ONE more stuffy essay from Cameron Barrett and other squares like him (was it Carl Steadman who wrote the essay about daytrading?) about how daytraders are bad, about how all these newbies are ruining everything, and about how it used to be better in the old days, I'm gonna go mental. Seriously. :)


 
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