Is the Nasdaq Actually Better than the Dow?

Remember Nasdaq (NASDAQINDEX: ^IXIC  ) 5,000? How about Nasdaq 500? The famed tech-heavy index reached 500 points for the first time on April 12, 1991, two decades after it was created. That day, the entire market was in a good mood after a report showed that the Consumer Price Index (a common measure of inflation) fell for the first time in five years. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) closed at 2,920.79 that day, compared to the Nasdaq's 501.62-point finish.

The growth of the Nasdaq and the Dow, presented here side-by-side over various time frames, offers some interesting insight to the difference between exclusive but presumably stable indexes and broader but more speculative measures of market health:

Time Frame

Nasdaq Total Growth

Dow Total Growth

Nasdaq's creation to Nasdaq 500

400%

231%

Nasdaq 500 to Nasdaq 1,000

100%

62%

Nasdaq 1,000 to Nasdaq 5,000

400%

111%

Nasdaq's creation to Nasdaq 5,000

4,900%

1,035%

Nasdaq's creation to 40-year anniversary

2,697%

1,287%

Nasdaq 5,000 to financial-crisis low

(75%)

(35%)

Nasdaq 5,000 to 10 years later

(53%)

6%

Nasdaq 500 to 20 years later

449%

335%

Even though the Nasdaq still comes out ahead in both shorter and longer timeframes, recent history has been most unkind to the tech-focused index. An investor seeking returns from Nasdaq stocks would still be far ahead of a Dow investor today, if both had held since 1971 -- but a Nasdaq investor who had switched loyalties after the dot-com peak would have done a bit better. It can be exciting to chase big gains in smaller stocks, but if they all go far beyond their normal measures of value at the same time, it can be years (or decades) before those stocks ever return to their former heights.

Three cheers for this Nasdaq stock
Nasdaq favorite Yahoo! (NASDAQ: YHOO  ) made its hotly anticipated public debut on April 12, 1996. Its shares, initially offered at $13 apiece, closed a staggering 150% higher at $33. The company, in existence online for only two years and incorporated for only one, finished the day valued at more than $800 million. It was one of the largest tech IPOs in years and one of the most dramatic examples of rapid dot-com success -- Yahoo had reported revenue of only $1.4 million the previous fiscal year for a loss of $643,000.

The IPO would in many ways resemble the much larger (though less immediately successful) Facebook (NASDAQ: FB  ) IPO that occurred 16 years later. Several analysts noted the intense level of retail-investor interest pushing share prices higher than otherwise expected. As would be the case with Facebook, this interest was driven strongly by Yahoo!'s then-leading market position and powerful brand name in the rough-and-tumble environment of the young Internet. Manish Shah of the IPO Maven newsletter told CNET that he was "expecting it to shoot up and then die down within at least a week. ... My recommendation is to stay away from it as much as possible." Steve Harmon of Mecklermedia said to "give it time until the large buyers bail out. ... Don't jump on the adrenaline ride unless you can handle the free fall." David Menlow of IPO Financial Network told Bloomberg Business News that "there is no explanation for these kinds of values, and retail investors will get left holding the bag."

Hold the bag they did -- all the way to the bank. Yahoo! was one of the dot-com bubble's most extraordinary beneficiaries, rising to a market cap well north of $120 billion at its peak. This growth brought IPO shareholders returns of nearly 7,800% in less than four years. Even after this unsustainably high valuation evaporated, Yahoo! remained significantly more valuable than it had been at its IPO. A decade later, shares still clung to gains of more than 2,100% from Yahoo!'s IPO. Even an insanely overvalued stock can be a good investment, so long as you don't get in at the height of market mania. Does that mean Facebook will someday be a megamultibagger, too? That might be a bit of a stretch: Its 2012 IPO valuation was more than 100 times Yahoo!'s valuation in 1996.

Spam, lovely spam, wonderful spam
Believe it or not, the first true instance of Internet spam took place shortly after Yahoo! began. On April 12, 1994, members of more than 6,000 Usenet (an early discussion-board system) forums found their digital haunts plastered with obnoxious, identical messages from the law firm of Laurence Canter and Martha Siegel, advertising a service for green-card-seeking immigrants. Anti-spam activist and lawyer Ray Everett-Church reflected on that incident in Wired years later:

When I arrived in the office on the morning of 13 April 1994, the receptionist handed me a stack of angry faxes and forwarded a voice mailbox full of furious calls. All the messages were about the Internet, the Green Card Lottery, and a pair of Arizona lawyers. By the time I stumbled to my cubicle, I had met the enemy. Their names were Laurence Canter and Martha Siegel. ...

In the early 1990s, Congress devised the Green Card Lottery program to encourage diversity in immigration. Unfortunately, it also provided an opportunity for charlatans to charge exorbitant fees to file lottery entries for hopeful immigrants. In truth, all it took to enter the drawing was a postcard with your name and address mailed to the designated location.

Canter and Siegel, a husband-and-wife law firm, decided to join the lottery frenzy by pitching their own overpriced services to immigrant communities. But these two were not your run-of-the-mill hucksters. They were innovators with a penchant for technology.

Canter and Siegel chose the Internet, specifically Usenet newsgroups, as their vehicle. The medium would never be the same again.

The two tech-savvy lawyers had hired a programmer to create scripts that would post the same message to many Usenet newsgroups at the same time, advertising with the subject "Green Card Lottery-Final One?" They'd hit on the necessity of automation in the spam game, realizing that the only way to make a formulaic post work as advertising would be to post it to as many places as possible in as short a time as possible. The pair, when interviewed later that year, claimed to have made $100,000 from a scheme that cost "pennies." However, the Supreme Court of Tennessee (where Canter and Siegel practiced law) disbarred them for illegal advertising in 1997, making the first spammers also the first people to be punished for spamming.

Today, spam is most often found in email, where it makes up at least half, and potentially up to 90%, of all daily email volume. However, just as spam began on message board systems, it's finding its way back with increasing frequency, as you may notice while browsing some of the more popular articles here on Fool.com and elsewhere on the Internet. The company that can finally solve the spam problem for good will be a good investment indeed.

Is now the time to buy Facebook?
After the world's most hyped IPO turned out to be a dunce, most investors probably don't even want to consider shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.


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