Last week, the stock market had a hiccup when, for just a moment, one stock analyst suggested that maybe, just maybe, Amazon.com wasn't worth all that money. Was this another case of the emperor's clothes or not? Internet stocks fell.

But I think they ARE worth these high prices. For most of this longest of bull markets, they've been with us, the Internet IPOs. From Netscape Communications in 1994 right up through whatever little tech company goes public this afternoon, we've had this phenomenon of spectacular early price rises that seem to have no fundamental economic support whatsoever. Sometimes gravity reasserts itself, but sometimes it doesn't, leaving us with a few companies with market capitalization almost beyond understanding. How the heck did Yahoo! ever get to be worth twice as much as Sears?

Something has clearly changed. A market driven for decades by price-to-earnings ratios appears to no longer require an 'E' in PE. The old technique of building a profitable little company, tuning earnings for a few quarters, then going public to finance the next big growth spurt is over. Now high tech companies are born, introduce a product, then go public. It's as though all it takes to get money coming in from the capital markets is to have a product — almost anything — going out the door. And of course, there are market fundamentalists who see this as a death trend, the end of market life as we have known it. But those fundamentalists are wrong. Yahoo! really is worth all that money.

It started not with Internet stocks, but with biotechnology. From Genentech in the late 1980s on, the market embraced the concept of buying into a stock that not only had no earnings to support the price, but often had no sales. Somehow in biotech, with the FDA-enforced long time to market, it made sense. It was easy to see a potential bonanza slowly working its way down the product development pipe. The biotech companies found they could literally turn to the public for their last round or two of what would have been venture capital. Though going public is a pain in the butt, regular investors consistently support higher valuations than do jaded venture capitalists, so the entrepreneurs get even richer.

Turning to the public for venture capital allows the real VCs to spread their money across an even larger swath of companies. Since they are often playing the odds, more companies means more innovation, more successes and more growth. Early IPOs have thus turbo-charged the whole wealth generation apparatus. It's possible to argue that this has been a major factor in extending the bull market.

So we have all become venture capitalists. And in the case of Internet stocks, our rationalization for doing so is provided by the holy trinity of Microsoft, Cisco, and Dell. Of course, these companies aren't at all like today's Internet startups. Microsoft, for example, never wanted to go public at all. Bill Gates would be happy to be running a private company today, but private sales of Microsoft shares were reaching the level in 1986 that the Securities and Exchange Commission would have forced an IPO had Microsoft not taken the initiative. Each of these companies had a good old-fashion IPO complete with sustained earnings growth. But it is the result of those IPOs that got our attention. Investing $100 in Microsoft in 1986 would yield $18,000 today. Investing $100 in Cisco Systems in 1990 would yield $24,000. And investing $100 in Dell back in 1988 would today yield more than $30,000. Returns like these get noticed.So investors are looking for the next Microsoft, the next Cisco, the next Dell. And they are willing to jump on what they believe to be that gravy train earlier than ever, even before their dream company is profitable. All it takes is a consensus that the product area qualifies as THE NEXT BIG THING. The last big thing was the personal computer and the next big thing, everyone seems to agree, is the Internet. So Internet IPOs are hot.

A question that investors often ask is, "How can these share prices be sustained without earnings?" The answer is they are sustained because we sustain them. The market no longer seems to require earnings from certain types of companies. And if the market doesn't require earnings to support a good stock price, then it would be foolish for these companies to have earnings. It is much smarter for the companies to fold right back into growth what might otherwise be booked as profit. Why pay taxes?

Could Amazon.com be consistently profitable? Yes. Could Amazon.com be consistently profitable and still prevail in its death struggle with Barnes and Noble? Probably not.For Internet companies, it is grow or die, and we as investors seem to have instinctively bought-in to that concept. And our reward for patience is the prospect of a return on investment in the Microsoft-Cisco-Dell class. We are counting on what the lady at the bank calls "the miracle of compound interest." What's key to this miracle happening, of course, is selecting both the right industry and the right company. Though the Internet is still nascent, we all seem pretty confident that it will eventually revolutionize communication and entertainment. So we're happy with the industry. It's choosing the right company that's the hard part.

Which brings us to Yahoo! This is the quintessential Internet portal, the single most valuable property in cyberspace, yet it is also a company that owns no technology. You could build your own Yahoo! from off-the-shelf parts. The founders were a pair of slacker Stanford PhD candidates (not as much of an oxymoron as you think) who started a company as a distraction from writing their dissertations. Jerry Yang and David Filo are billionaires today. But they aren't Yahoo! True, Filo's title is Chief Yahoo, he lives in the same apartment, drives the same car and has a clause in his employment contract that specifically allows him to be barefoot at work all of the time. Yang and Filo are figureheads, representatives of a time and a lifestyle that isn't really Yahoo! Yahoo! is like Disney's Frontierland, a rustic facade under which you'll find a well-oiled high-tech machine with a Michael Eisner-type at the very bottom, scooping money into a bucket.

Yahoo! is a franchise, and that's exactly what you want to look for in an Internet investment. Does this company define a category? Does it lead that category? Does the company have staying power? Yahoo! and its very professional management have bedeviled competitors from the beginning. Ten years from now when the Internet as a financial engine is 100 times as big as it is today, Yahoo! will be there and that's what makes it a good investment. Yes, Yahoo! is worth $30 billion.

The same principle can apply on a smaller level. Is the Internet THE NEXT BIG THING? Yes. Then within the Internet are there other definable sustainable niches? Yes. Here's an example from my own admittedly quirky portfolio. I am an investor in an Internet mortgage broker called eloan (http://www.eloan.com). Eloan is not yet a public company, so mine was a private investment. In fact, it was more like a panic investment, because the company was unable to make its payroll. I literally covered the payroll for a week in exchange for stock. Startups are always running out of money.

So how did I justify my investment in eloan? It satisfied my five criteria for a great Internet investment: 1) I could afford to make the investment; 2) the niche they chose — Internet mortgage brokerage — was a no-brainer. The Internet is perfect for selling any product that can be delivered as electrons and where the Net can be used to eliminate middlemen; 3) eloan was an early player in this niche; 4) the founders were experienced mortgage brokers who added technology rather than nerds who were trying to learn the mortgage industry, and; 5) it just seemed obvious that eloan would either be a longterm player in this niche or would be acquired at a premium. As long as they could make the next few payrolls, I assumed my investment was secure.

But what if it wasn't secure? What if eloan went down the tubes? I could afford to lose the money. This is the first and last key point to Internet investing: invest only money you are not only willing to lose but you won't even miss. It's not that you expect to lose the money, but investing from this position makes it much easier to take a calculated risk. Some experts advise investing in a basket of high-tech companies, hoping for what the VCs call a "ten-bagger" - an investment that returns ten times or more -in the mix. All this technique does is drag down your return. Instead, take that money you were holding in Kruggerands and bet on what you believe will be the next franchise company.

"All great companies almost always look expensive," says Michael Moritz of Sequoia Capital, Yahoo's original and very happy VC. "Microsoft has almost always been considered expensive. Cisco has almost always been considered expensive. The only thing that is more expensive than becoming an investor in one of these franchise companies is not being an investor."