The dot-com bubble, 2000
In the late 1990s prices of internet companies rose dramatically, often without profits and sometimes even without revenue. After the peak in March 2000, the tech heavy Nasdaq lost about eighty percent.
The internet was a real, big change. That's exactly why the bubble worked: the story behind it was true. Only the price people paid for it was wrong.
Because many companies had no profits, new yardsticks were invented, such as the number of page views. When new metrics are invented because the usual ones don't paint a good picture, that's a reliable warning sign.
From March 2000 prices fell. The Nasdaq, an index full of tech stocks, fell from over 5,000 points to about 1,100 by October 2002. Many companies disappeared entirely, such as the pet supplies retailer Pets.com, which didn't even last a year on the stock market. Others survived and later became very valuable. Amazon's shares fell by over ninety percent back then.
The most important lesson: a true story doesn't protect you from a wrong price. The internet changed the world as promised, and still investors lost a great deal of money because they had paid far too much for it. The Nasdaq took until 2015 to get back to its old high.
What was typical was that companies were no longer valued by their profit. Instead, user numbers, reach or revenue growth counted, even when it wasn't foreseeable that this would ever turn into profit. That was no accident. When the old yardsticks show something is too expensive, the wish for new yardsticks grows.
On top of that came a large supply of new shares. More companies than ever went public, and many of them made no profit. And after a lock up period of a few months, the first owners were allowed to sell their shares. From 2000 onward, that brought extra shares onto the market.
The case is the textbook example that a correct prediction about a technology and a good result as an investor are two different things. The technology developed largely as expected. Early investors still lost, because the expected benefit was long since in the price and in the end went to 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.
- The benefit of a new technology ends up with a few later winners.
Did you get it?
Why were new valuation metrics introduced?
Because the familiar yardsticks showed the shares were too expensive. Needing new yardsticks is itself a warning sign.
What role did lockup periods play?
When the lock up periods ended, the first owners could sell, and extra shares came onto the market.
What's the central lesson?
Being right about a technology doesn't automatically earn you a good return.
Sources and further reading
- Price series of the tech-heavy US index, and statistics on IPOs from 1995 to 2002.
- Federal Reserve Bank of St. Louis (FRED), daily closing values of the Nasdaq Composite (series NASDAQCOM): high of 5,048.62 on March 10, 2000 and low of 1,114.11 on October 9, 2002. Retrieved October 9, 2026. View source ↗
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