It's interesting to think about in hindsight. But on March 10, 2000, no one had any idea that the intraday high of 5132.52 was going to be the Nasdaq Composite's high-water mark -- not just for the day, but for years.
It was five years ago today that the Nasdaq reached that peak. In the intervening five years, the Nasdaq has lost 60% of its value. It's been a lot lower: In October 2002, it hit a low of 1108, for a loss just shy of 80%. These are degrees of wealth destruction the breadth and depth of which have been matched only during the Great Depression.
So, what happened on March 10, 2000? In a word, nothing. There were no editorials the next day stating, "Well, that's as good as it's gonna get." The big event many people point back to now as the thing that made investors blink -- MicroStrategy's
I recently went back and looked at some of the posts on the JDS Uniphase
Of course, the arguments that people have lost 60% of their money are somewhat specious. The Nasdaq stood above 5000 during parts of only five trading days, and it closed above 5000 only twice. The person who invested every penny of his money on one of those five days, all in Nasdaq stocks, most likely does not exist. What's more painful, though, is that the Nasdaq Composite isn't all technology. It includes companies like Costco
So many investors now look at that period, and the dot-com craze, and see that the bubble was obvious. This is hindsight bias. The best I could muster up in 1999 was, "Yeah, it probably is a bubble," along with some statements that big-cap tech stocks were extraordinarily risky in 2000. Bubbles form because participants are blind to their existence.
Investors can't deploy their capital in any environment other than the one that exists at that moment. In his new (and fantastic) book, Unexpected Returns, Ed Easterling shows the danger in buying stocks when they are priced at exceedingly high multiples. The biggest mistake people seemed to make in the late 1990s was forgetting that stocks' performances are inexorably tied to the businesses underlying them, and that there is no real safety in paying for great potential if that potential is already more than priced in.
As security prices have taken off in the past two years in many sectors, I fear that investors are making the exact same mistake that they did in 1999 -- confusing the performance of their stocks with the performance of the businesses that those stubs represent.
The only reason 2000 was so painful was that stock prices came so completely unhinged from their underlying businesses. The Nasdaq trebled between March 1998 and March 2000. Almost all of this growth served as nothing more than fuel to maximize the pain of the eventual collapse.
Five years ago today, someone, somewhere, unnoticed by anyone, struck a match.
Bill Mann admits that he owned CMGI at the beginning of 2000 but came to his senses, as he says, "just in time." He now holds shares in Costco.
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