The dot-com bubble, 2000
In the late 1990s, internet company prices rose dramatically, often with no profits and sometimes no revenue. After peaking in March 2000, the tech-heavy index lost roughly eighty percent.
The internet was a real, major change. That's exactly why the bubble worked: the underlying story was correct. Only the price was wrong.
Since many companies had no profits, new metrics got invented, like page views. When metrics get invented because the usual ones don't paint a good picture, that's a reliable warning sign.
Starting in March 2000, prices fell. The tech-heavy index lost roughly eighty percent by 2002. Many companies disappeared entirely; others survived and later became very valuable.
The most important lesson: a correct story doesn't protect you from a wrong price. The internet changed the world as promised, and investors still lost enormous amounts of money, because they'd paid too much for it.
Characteristic was the shift in valuation basis from earnings to substitute metrics like user counts, reach, or revenue growth with no profitability outlook. This shift isn't coincidental, it's a necessary consequence: where established benchmarks signal overvaluation, demand for new benchmarks arises.
The supply side amplified this. The number of IPOs reached record levels, with a substantial share of listed companies reporting no profits. At the same time, lockup periods for existing shareholders expired after a few months, creating additional selling pressure starting in 2000.
The case is also the standard example of technology forecasting and investment outcome diverging. Technological development largely proceeded as expected, while early investors' returns were negative, because the expected benefit was already fully priced in and, on top of that, concentrated among a few later winners.
Summary
- Newly invented metrics are a reliable warning sign.
- A correct forecast about the future doesn't protect against a wrong price.
- A technology's benefit concentrates among a few later winners.
Did you get it?
Why were new valuation metrics introduced?
Because the established ones signaled overvaluation. That shift is itself a warning sign.
What role did lockup periods play?
Their expiration brought additional shares from existing shareholders to market and raised selling pressure.
What's the central lesson?
A correct technology forecast doesn't automatically lead to a good return.
Sources and further reading
- Price series of the tech-heavy US index, and statistics on IPOs from 1995 to 2002.
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