- Aug 2, 2020
Dot-BombBack in the late 1990s, a very strange thing was happening. I remember it well. I had just graduated graduate school and the company I was working for was throwing money at things. They were purchasing ridiculous supplies and services and were hiring ridiculous employees - all because they had too much money. If memory serves, they hired a guy to make logos and hired another guy to fill the role of Chief Happiness Officer or something like that. Companies at the time had no idea what to do with all the funny-money that had sitting around, so they began throwing it at other companies, people, and products. The tech companies were the worst. I have a friend who graduated with an undergrad degree in pretty much nothing and went to work for a tech company right out of college. His starting salary was $70,000. The kid was 21 years old! I remember telling him to save his money. Don't spend it because it's not going to hang around for long. I mean, how could it? The situation the United States was in was untenable. It was obviously in a bubble.
So what was going on at the time that provided so much money to so many companies and individuals? Well, for starters, the Fed was concerned about the fallout of Y2K. If you haven't lived through that bunch of nothing, count yourself lucky. For years, we were warned about the impending doom the dates inside of computers throwing errors would cause. In 1998, I remember listening to the radio where a woman called in to tell the world that she had purchased so many cans of food that she was making couches out of the boxes. On New Year's Eve, 1999, I went to bed thinking that I would awaken to the apocalypse. When I did wake up, absolutely nothing had changed. I can't remember hearing even one report about a computer that malfunctioned. The entire thing was a fabricated fear porn story that was used to inject massive amounts of liquidity into the economy. Why? I have no idea, but it gave birth to the dot-com bubble that enabled my friend to land a $70,000 job right out of college. I wonder if he puts that one on his resume today. I'll have to ask him.
What was the dot-com bubble? It was a time when technology companies came into their own. Because of all the market liquidity, thousands of tech companies were being born every day. Many of them went public and offered stock. A lot of these companies were reputable and offered good products, but some of them were nothing more than a guy sitting in his basement making websites. It seemed like each and every company that went public, instantly made the owner's rich. It was a crazy time. Like all bubbles though, this one burst. The bursting effectively put the great majority of tech companies out of business. Even some large companies failed in the wake of the market crash. Companies such as Enron, WorldCom, and Global Crossing, if you remember them.
The Nasdaq is the market that trades many tech companies. For 14 years before the mid 90s, the Nasdaq was valued below $1,000. In 1995, it broke the $1,000 mark and by March of 2000, it hit $4,900. If you owned the Nasdaq index during that time, you had about six months to sell at over $3,500 and just a short time to sell at the peak of over $4,500. You could have made a killing if you timed the market right. If you bought when it was high though, like so many people did, you could have been wiped out. The index fell to about $1,200 a year later. But all was not lost. If you merely held on for a few more years, you could have made more money than even the biggest money makers back then. Take a look at this chart:
Talk about bubbles. We're in one right now. This one makes the dot-com bubble look like a pimple on a baboon's bottom. Granted, there's a heck of a lot more liquidity in the global economy today than there was back in 2000.
Old time investors do a lot of talking today about picking the right companies. Companies of growth or value or whatever. In my humble opinion, stock picking is like a lost relic. It's over. Investing is all about markets today and the overall S&P 500 is one of the biggest players. Even well run, ultra valuable companies have their stock prices slashed unnecessarily because of overall market drops. Because of the popularity of mutual funds and ETFs these days, individual companies get swept up in overall market purchases and sell-offs. So don't bother attempting to value a company, unless you're working for a ratings agency or a finance department of a large corporation.
I want to make one final note about this dot-com bubble topic. Whenever a bubble pops and a market plummets, wealth wasn't destroyed in any which way. In order for a bubble to pop, investors had to sell. It's those sellers who strode away with all the cash. Eventually, they'll put it back in and the market will begin to grow again. So any wise investor would tell you to ignore market prices and go on with your day. Just keep your investments put and don't even think about it.
This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney