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Fri, Apr 14, 2000
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SEC's Levitt Says Investors May Be Overextended
By Christopher Noble   Reuters
NEWTON, Mass. — Securities and Exchange Commission Chairman Arthur Levitt said on Monday that he was concerned many retail investors did not fully understand how the financial markets work and were overextending themselves.

With the New York Stock Exchange and the Nasdaq rising to unprecedented heights and retail investors becoming the driving market force, he said there is a risk these investors could fall victim to unwarranted optimism because they do not understand the fundamentals of market dynamics.

"But in the celebration of today's prosperity, I'm concerned that some of the basic but important fundamentals of investing are being lost on investors. Or, even worse, being ignored, " Levitt said in a speech at Boston College's Finance Conference 2000.

"Unless investors truly understand both the opportunities and the risks of today's market, too many may fall victim to their own wishful thinking," Levitt said.

While some of the euphoria is justified, Levitt warned that, as in the early days of the car business and the personal computer industry, many of today's Internet companies would fail in the long run. He said this should raise questions about the valuation of many of these firms and about their ability to survive.

"Valuing a company has never been an exact science. But in today's market, does it even make sense anymore to look at a P/E ratio? Are some of today's companies really worth one thousand times nothing?" he said.

"Any way you look at it, many of today's valuations seem to defy traditional explanation. The run-up of these valuations is largely the result of multiple stock splits and soaring stock prices fuelled by an almost insatiable investor appetite," Levitt said.

He said all this investor activity creates pressure on new companies to provide huge returns. Many of the start-ups go public too quickly.

"Sometimes their race to an IPO comes at the expense of laying a foundation for a viable, long-term company," he said.

While Levitt said there was nothing wrong with buying on margin, he said many investors did not understand it.

"I am very concerned about investors who may be borrowing on other assets such as homes or real estate to invest in our markets," Levitt said, noting that there is nothing wrong with controlled, informed margin buying.

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