Most stocks today that are doing well are considered tech stocks. There are many companies that could be considered tech stocks, but today it is mostly internet related innovation that are doing very well as far as stock price increases. Some of these companies have risen so much that they are worth more than the GNP of many countries. So, when do we stop and say, 'enough is enough?'

When stocks are valued so highly that miracles have to happen, investors should get out. Take Cisco, for instance was recently valued more than Microsoft which was over one half a trillion dollars! And Cisco probaby isn't the best example of this, but it is one of the biggest.

Internet companies have routinely been worth billions of dollars. Many of these companies have very low revenues and have yet to earn a dime. Its understandable that start-ups will loose money for a while, but many of these companies that are worth billions have business models that really have no competitive advantages that will allow them to make profits in the future.

Warren Buffett, one of the most successful investors of all time have said that if he had an investment class, he would have students try to value internet companies, and if they came up with any number greater than zero, they would get an "F". I agree with this because investors are supposed to be able to expect future cash flows and be able to put a value on an investment. With most internet companies, this is impossible.

Many internet companies are relying solely on advertisng revenue now, and are trying to figure out ways of making money. This is not the sort of thing you want to invest in. Today, everyone is adverising, which has brought up the supply of advertising opportunities which should bring down the price due to the rules of supply and demand. For more on this read our Web Advertising Model article.

Back to the subject, what is a company worth? is the basic question investors must ask. This is determined not just by current net worth of the companies assets, but a prediction of how much the company will earn in the future discounted to the present. For more on this purchase the book.

However, when these high flighers are discounted back to the present, their expected returns may be in the single digits. So, instead of a 15% return a year, they may be lucky to get 5%.

Some high flyers can be easy to spot. Companies such as Microsoft and Cisco are very large companies. When companies become large their growth rates eventually slow. That is because it is hard to grow a large capital base at a fast rate. Any mutual fund manager or investment manager that has had to deal with large amounts of capital will tell you the same thing. For this reason, most people would probably accept that companies such as Microsoft will not be able to have the high returns that they have had in the past. For instance if Microsoft stock were to go up 26% a year for 10years, the company would be worth about 5 trillion dollars!

Now, if GDP in the US continues to grow at about 5% a year for ten years (which is very optimistic), and Microsoft grows 26%, Microsoft will be a very significant portion of U.S. GDP. This seems very unlikely. When stocks start reaching these crazy levels, investors need to stop and say no more!