What the Bubble Taught Us About Tech

The Nasdaq 100 peaked on March 10, 2000. Over the next two and a half years, it lost 78% of its value, and many of the internet companies that survived still sell below their all-time highs. In this anniversary series, we ask what we've learned over the past ten years.

In the battle of the bubbles, the dot-com disaster may have been less devastating than the recent financial fiasco and housing hullabaloo, but it still destroyed about $5 trillion in value.

Too many of us spent too many precious dollars chasing the next eMeringue.

Bad enough to write a book about
So ugly was the bust that the co-founders of one of Wired's notable dot-com survivors -- our very own David and Tom Gardner -- felt compelled to confess their mistakes and offer up lessons learned in their 2002 book, The Motley Fool's What to Do With Your Money Now. Among them: paying too much for growth, and failing to give profits due respect.

Tom and David weren't the only ones. Consider the poor souls who bought shares of these dot-com dynamos at the height of the bubble. They've yet to come close to breakeven:

Company

10-Year Total Return

Ariba (Nasdaq: ARBA  )

(98.6%)

Move Inc. (Nasdaq: MOVE  )

(96.6%)

Autobytel

(89.4%)

Qwest (NYSE: Q  )

(89.3%)

TheStreet.com (Nasdaq: TSCM  )

(69%)

Cisco (Nasdaq: CSCO  )

(63%)

Source: Yahoo! Finance.

When sock puppets were all the rage
And that's without accounting for these one-time wonders, none of which exist today:

Pets.com. The sock-puppet dot-com. Made famous in a series of clever TV commercials, the mike-clad pitch pooch never was able to convince pet owners they'd do better by ordering food and supplies on the Web. Our own Jeff Fischer put the flameout in perspective in a November 2000 column:

Pets.com raised millions with nary a sustainable advantage to its name (it was not a Rule Breaker), and the venture capitalists knew that most of the money would be blown on marketing. Then, Pets.com was able to go public without a penny of value creation, let alone meaningful experience, under its belt.

Webvan. The solution-to-a-problem-that-didn't-exist dot-com. Consumers never showed signs of preferring grocery delivery to shopping at their local store, yet Webvan was still able to raise $375 million in a 1999 IPO. The company would be out of business two years later, denting the reputation of former Accenture (NYSE: ACN  ) boss George Shaheen.

DrKoop.com. The buy-a-big-name-and-see-who-shows-up dot-com. Founded in 1998 with $6 million in financing and rights to the name of former U.S. Surgeon General Dr. C. Everett Koop, this site was supposed to draw advertisers who would pay to connect to millions of health care-conscious users. Turns out that was (ahem) optimistic thinking. Today, the company is a shell of its former self, embedded within the HealthCentral Network.

Kozmo.com. The great-idea-that-never-IPO'd dot-com. Kozmo.com promised free delivery of, well, anything. Sort of like your own personal fido-cum-pizza delivery boy, except the service would fetch everything from DVDs to snacks. Problem was, Kozmo.com treated pricing as an afterthought. You know what happened next.

Morons, crooks, and ice statues -- oh, my!
Then there are the not-quite dot-coms that nevertheless left their mark by trying to profit from the hysteria, at times illegally and often unethically. You know the names: Enron, WorldCom, and Tyco.

Of the three, Tyco has reemerged as a multibillion-dollar conglomerate. But under the reign of former CEO Dennis Kozlowski, Tyco was a symbol of dot-com excess. The Koz's company-funded toga parties, resplendent with vodka-whizzing ice statues, are first-ballot entries in Corporate America's Hall of Shame.

Enron and WorldCom have more sinister stories to tell. In each case, phantom prrofits led investors astray as executives cashed in. Former CEOs Jeff Skilling and Bernie Ebbers have since been fitted for orange jumpsuits, and neither is likely to breathe free air soon.

The dark before the dawn
We can learn a lot of from these fraudsters and flimsy business models, lessons that apply to this day, 10 years after the "Pop Heard 'Round the Digital World." Here are three:

  1. It's never, ever "different this time." Sock puppets don't change the rules of economics any more than Wile E. Coyote gets to change the laws of physics by strapping on a ragged pair of cartoon wings.
  2. Owners usually beat flippers. Businesses run by owners with a lot to lose tend to do better than opportunistic entrepreneurs who hope to seize the moment and cash out. Don't believe me? Check the list of the world's billionaires sometime.
  3. There's no substitute for a competitive advantage. Flippers fail because they build for the moment rather than for longevity and need. Companies that sell in-demand products and services are the ones that generate healthy margins, profits, and cash flow -- the fire that fuels stock returns.

Had enough cold coffee? I don't blame you. Here's some good news: In the very dark days of May 2002, Netflix (Nasdaq: NFLX  ) went public, introducing its disruptive business model to common equity investors. CEO and founder Reed Hastings and his team have created staggering amounts of wealth in the years since.

Netflix is why we're publishing this series today. You see, for as much damage as the dot-com bubble caused, and for as much trouble as the recession could still be causing, there's always going to be a Netflix out there for you to invest in, especially when it comes to the ever-shifting sands of tech.

My colleagues and I at Motley Fool Rule Breakers have some ideas for where to start your hunt for the next Netflix. Just click through the article links at the top right of this page.

Bubbles are always fun till they pop, leaving you covered in goo. One decade ago, a lot of us got covered. But that was then, and this is now. We're smarter, more Foolish, and have just as many ways to profit.

Eat that, Enron.

What lessons did you learn from the dot com bubble? Share your thoughts using the comments box below.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Netflix is a Motley Fool Stock Advisor selection. Accenture is a Motley Fool Inside Value pick. The Fool's disclosure policy could use a nap. 'Night.


Read/Post Comments (9) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2010, at 6:47 PM, holosys wrote:

    They say "If it's too good to be true, it probably isn't."

    Of course, every exception of that old adage, like the historical performance of Berkshire Hathaway shares, is considered one of those rare "too good to be true, but IS true!" exceptions.

    The part that has me scratching my head as your average Joe Investor is this: Bernie Madoff ran an operation that was hailed as "too good to be true, but IS true" for decades... just like Warren Buffett did. The difference, as anyone will tell you, is Bernie Madoff turned out to be literally too good to be true, whereas Warren Buffett is the real thing.

    Admittedly, we all just "know" that Buffett is the real deal. Don't ask me why, because his secret recipe for success is so mysterious that if Buffett was anybody else, Berkshire’s crazy and predictable performance would trigger the launch a government investigation. But it's Warren Buffett! And I except on blind faith this man is the one and only exception to the rule.

    What I find kind of haunting, however, is this: Bernie Madoff was caught because he dumbly admitted his crimes to his family, and they reporting him. If he had just kept his mouth shut, he might have had a New York Times bestseller written about his "investment genius" one of these days! The Easton Press might have one day published a signed leather-bound edition by Madoff, and he might have shared the limelight with Buffett. And of course his investors might have lived happily ever after in their luxurious digs.

    I guess my point is that it seems we live in the dark ages of investing. Wall Street is like a Lego set of black boxes snapped together to form a so-called economy. Buffett is our hero because the performance of Berkshire is, well, genius. As for Madoff, can you argue is it NOT true that if he kept his big mouth shut, he would have stolen some of Buffett's limelight and rode off into the sunset, perhaps only discovered as a fraud 100 years from now by some Harvard economics law scholar?

  • Report this Comment On March 10, 2010, at 6:48 PM, holosys wrote:

    They say "If it's too good to be true, it probably isn't."

    Of course, every exception of that old adage, like the historical performance of Berkshire Hathaway shares, is considered one of those rare "too good to be true, but IS true!" exceptions.

    The part that has me scratching my head as your average Joe Investor is this: Bernie Madoff ran an operation that was hailed as "too good to be true, but IS true" for decades... just like Warren Buffett did. The difference, as anyone will tell you, is Bernie Madoff turned out to be literally too good to be true, whereas Warren Buffett is the real thing.

    Admittedly, we all just "know" that Buffett is the real deal. Don't ask me why, because his secret recipe for success is so mysterious that if Buffett was anybody else, Berkshire’s crazy and predictable performance would trigger the launch a government investigation. But it's Warren Buffett! And I except on blind faith this man is the one and only exception to the rule.

    What I find kind of haunting, however, is this: Bernie Madoff was caught because he dumbly admitted his crimes to his family, and they reporting him. If he had just kept his mouth shut, he might have had a New York Times bestseller written about his "investment genius" one of these days! The Easton Press might have one day published a signed leather-bound edition by Madoff, and he might have shared the limelight with Buffett. And of course his investors might have lived happily ever after in their luxurious digs.

    I guess my point is that it seems we live in the dark ages of investing. Wall Street is like a Lego set of black boxes snapped together to form a so-called economy. Buffett is our hero because the performance of Berkshire is, well, genius. As for Madoff, can you argue is it NOT true that if he kept his big mouth shut, he would have stolen some of Buffett's limelight and rode off into the sunset, perhaps only discovered as a fraud 100 years from now by some Harvard economics law scholar?

  • Report this Comment On March 10, 2010, at 8:48 PM, nin4086 wrote:

    >>

    n the battle of the bubbles, the dot-com disaster may have been less devastating than the recent financial fiasco and housing hullabaloo, but it still destroyed about $5 trillion in value.

    >>

    The dot com bubble (bust actually) did not destroy $5 trillion in value. The housing bubble did no such thing either. The $5 trillion was never real value; it was fake (that is why we call it bubble). I get annoyed when people use such meaningless rhetoric, especially if they are journalists for a company I respect - the motley fool!

  • Report this Comment On March 10, 2010, at 10:29 PM, none0such wrote:

    @ nin4086

    "In economics, of all topics, value is most disputed. This is because the theory of exchange which lies at the threshold of our science forms a connecting link between problems of a purely economic nature and the social. Moreover it acts as a point of departure for theoretical inferences affecting the entire domain of human economy. Its abstract nature renders an objective approach quite difficult and for all who have ventured to overcome these impediments it turned to be a stumbling block. Thus by its nature the theory of exchange value is a most ungrateful topic to be dealt with. Yet, being of essential importance to economics and a problem which was not solved, it invites adventurous minds to attempt its solution." (A. Gersch, On the Theory of Exchange Value, p. v)

  • Report this Comment On March 11, 2010, at 7:11 AM, ryanalexanderson wrote:

    @holosys

    > As for Madoff, can you argue is it NOT true that if he kept his big mouth shut, he would have stolen some of Buffett's limelight and rode off into the sunset, perhaps only discovered as a fraud 100 years from now by some Harvard economics law scholar?

    Yes, I can definitely argue that. Madoff's Ponzi scheme crumbled because the market stopped its exponential expansion. There was no money to pay out to people. Whom he told about his scheme is utterly irrelevant - all the discretion in the world wouldn't have provided money to investors who sought to cash out.

    And the implication that Buffett and pre-crash Madoff are indistinguishable couldn't be further from the truth. These two individuals define the ends of a spectrum of disclosure between which almost everyone else operates.

    Madoff ran a black box that nobody knew the details about. Buffett is the most candid investor out there - he shouts out his failures as well as his successes with equal enthusiasm. His successes aren't "mysterious". They're simply the result of a investment discipline that hardly anyone else has.

  • Report this Comment On March 11, 2010, at 7:50 AM, TMFMileHigh wrote:

    'Morning all,

    >>Buffett is the most candid investor out there - he shouts out his failures as well as his successes with equal enthusiasm. His successes aren't "mysterious". They're simply the result of a investment discipline that hardly anyone else has.

    Couldn't agree more, @ryanalexanderson. Thanks to everyone for your comments.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 11, 2010, at 7:50 AM, TMFMileHigh wrote:

    'Morning all,

    >>Buffett is the most candid investor out there - he shouts out his failures as well as his successes with equal enthusiasm. His successes aren't "mysterious". They're simply the result of a investment discipline that hardly anyone else has.

    Couldn't agree more, @ryanalexanderson. Thanks to everyone for your comments.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 11, 2010, at 6:27 PM, PSU69 wrote:

    Tulip bubble. Feather bubble. Home flipper bubble. They just keep coming. Early cognition is crucial to success. Cramer screaming bad advice pleading with investors not to sell when he knows it is going to tank. Hilarious. I read Snowball about Warren B. and loved it. If you have not, give it a spin. Thick book and worth evey ounce. You will find an amazingly complex man with many skills and faults. Will AAPL become a bubble of brand zealots? I think not.. Real products that change the game for many business models.

  • Report this Comment On March 14, 2010, at 7:52 PM, derfberger wrote:

    What lessons did you learn from the dot com bubble?

    Don't chase the favorite fund company of the moment and transfer a good portion of your diverse mutual funds into one category--Janus

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