Dot-com Bubble
The Dot-com Bubble refers to the rapid rise and subsequent crash of internet-related stocks in the late 1990s and early 2000s. This speculative bubble was fueled by excessive investor optimism about the potential of internet companies, leading to inflated stock prices that were not supported by the companies' actual earnings or revenues. When the bubble burst, it resulted in significant financial losses for investors and a widespread market downturn.
4 Key excerpts on "Dot-com Bubble"
eBook - ePubThe Mystery of Market Movements
An Archetypal Approach to Investment Forecasting and Modelling
- Niklas Hageback(Author)
- 2014(Publication Date)
- Wiley(Publisher)
...Over the following two years, it ended up retracting all its gain almost to the starting point of the price rise; in all, it followed a typical financial bubble formation (see Figure 9.2). Individual stocks within the TMT sector (technology, media, and telecom) saw even more remarkable developments in terms of stock price upward movement, and on the way down many of them ended up in bankruptcy. Figure 9.2 NASDAQ Price Trend Highlighting the Formation of a Bubble between 1998 and 2002 Source: Bloomberg L. P. Warnings about the unrealistic valuations were ignored. Federal Reserve Chairman Alan Greenspan referred to the term irrational exuberance in a comment to the stock market in 1996. Warren Buffett warned repeatedly that the TMT sector was in a bubble formation that eventually would end in a crash. Obviously neither of them could provide any timing of the price bubble implosion. At the peak of the dot-com hysteria, just adding the prefix e - or a. com ending to a company's name could trigger an immediate increase in share price. It was not unusual for individual Internet stocks to increase by 20 to 30 percent on a single day; on the down turn of the bubble, the price drops could be of greater magnitude than that. These fast moves in the up-phase of the bubble led to many quick fortunes being built and triggered plenty of people leaving their careers or studies to take up stock trading for the first time or pursue full-time day-trading in and out of mainly Internet-related stocks, preferably with margin. These activities helped to push up trading volumes to unprecedented highs. The craze of the mania made it possible to list dot-com companies that never made any profits and in some examples hardly even had revenues. The fact that most of these companies had never been profitable forced changes to valuation methodologies; the focus had to be on various growth metrics as there were no profits...
eBook - ePubA History of Financial Crises
Dreams and Follies of Expectations
- Cihan Bilginsoy(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...The capital they attracted was buying into an “idea” that might or might not pay off in the midst of intense competition. However, the novelty of the product, incessant media promotion, and intense advertising were influential. The capital flow continued, and the Dot-com Bubble was well on its way in 1998. The geographic center of the new technology was Silicon Valley, near San Francisco, but many state and local governments in the US heavily invested in their own technology corridors, unimaginatively labeling them Silicon Alley, Prairie, Park, Coast, Hill, and so forth, with advanced-technology office spaces to create synergy and attract young technology entrepreneurs and start-ups. The boom and the bust The stock market boomed in line with the new technologies, products, and firms, and the new merger movement they initiated. The increase in stock-market indices took place against the background of the Fed easing monetary policy and lowering short-term interest rates, especially after the turbulence caused by LTCM. Financial crises in Asia, Latin America, and Russia also compelled many investors to direct their funds to safer assets, adding to the volume of financial wealth in the US. The exceptional performance of the stock market is illustrated in Figure 14.1. Over the decade the SampentityP 500 index rose by 116 percent in inflation-corrected terms, but the surge occurred in the second half of the decade. The price index rose by merely 14 percent over the first five years of the decade, at an annual rate of approximately 2.7 percent. Figure 14.1 Real SampentityP Composite Index, 1990–2000 (monthly). Source: Shiller (2005). The rest of the decade was an entirely different story. The index jumped 32 percent in 1995, 17 percent in 1996, 24 percent in 1997, 22 percent in 1998, and 16 percent in 1999. It was a phenomenal streak by any measure...
eBook - ePubThe Sceptical Investor
How contrarians bet against the market and win - and you can too
- John Stepek(Author)
- 2019(Publication Date)
- Harriman House(Publisher)
...The fact is that bubbles are rare. And even what seems like an obvious bubble can go on for literally years after it has first been spotted. When then-Federal Reserve chairman Alan Greenspan warned of “irrational exuberance” in the stock market on 5 December 1996, the dotcom bubble had barely started. The tech-heavy Nasdaq index almost quadrupled between then and its peak in March 2000. And while the Nasdaq did eventually shed all of those gains, it only ever touched Greenspan’s warning level again briefly at the tail end of the tech crash, and then again after the 2008 financial crisis. In short, Greenspan’s warning was of no real informational value to an investor. In all likelihood, if you had been invested in the Nasdaq, and you then bailed out on the Fed boss’s words, you’d have nursed a strong case of sellers’ regret and almost certainly got back in at the worst possible time. The key point to understand about bubbles is that they are about extremes. Regardless of how much you know about your financial history, their sheer ability to keep going beyond the apparent point of rationality will take you by surprise, which is what makes them so difficult to navigate. Extreme overvaluation A key concept underlying our understanding of bubbles and busts is the idea of ‘mean reversion’. This is basically just the observation that markets have their ups and downs. Sometimes they’ll be close to their ‘fundamental’ value (which is typically derived from the future cash flows the asset is expected to generate) and sometimes they’ll be far away from it (either above or below it). You can imagine mean reversion as being a piece of elastic that ties the asset’s price to its fundamental value. If the elastic gets too stretched in one direction or another, it’ll eventually ping back, and probably overshoot in the opposite direction as it does...
eBook - ePub- Jeffrey A. Hirsch(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...That came as no surprise—all bold predictions are first lambasted before proven true. This super boom is not only plausible but mathematically and historically within reason. Moves of this magnitude have happened several times throughout history, and they have always been preceded by tumultuous times and economic flatlines. In fact, big moves have happened with such regularity and clear cause that we have successfully identified why they happen, how they happen, when they happen, and what to invest in before and as they happen. By examining the past, we are able to shed light on the future. The first inklings of another potential 500 percent move in the stock market began to materialize in September 2002 as the first major downdraft of the secular bear market, begun in January 2000 with the dot-com crash, came to a close. The war drums were beating to invade Iraq and the stock market was plunging into the midterm elections. Individual investors remain disenchanted with the stock market, Wall Street pundits, and economists are on either end of the spectrum. The new bull market is under way or Armageddon approaches. However, the writing on the wall is clear. The long secular bear market is in its latter stages. Several more years of healing are before us, but the next super boom is already setting up. High levels of cash are waiting to pour back in and when they do, the all-clear horn blows. The rest of the chapter covers the unfortunate events of the past 12 years and points out which data we need to be watching as harbingers of the coming boom. Dot-com Bust versus 1929 Crash March 2009 may have brought new lows to old-school market indices like the Dow and S&P 500, but that was not the case for the tech-laden NASDAQ that nowadays often provides a better picture of the economy and stock market than its blue-chip brethren. Many gloom-and-doomers are predicting new Dow lows in the future...
