What Popped the Dot-Com Bubble?

Wall Street has infamously had its share of ugly Octobers, so Alison Southwick and Robert Brokamp chose this month to offer their listeners a special treat: a four-part series on the history of market crashes in the United States.

In this Motley Fool Answers podcast, guest and former Fool Morgan Housel leads the discussion on a topic near and dear to the hearts of online-based operations like the Fool: the dot-com bubble and the subsequent long and painful crash. Whenever trouble strikes, everyone wants to know why. But even after a couple of decades to reflect on that, the answers may not satisfy.

A full transcript follows the video.

This video was recorded on Oct. 17, 2017.

Alison Southwick: So the internet is going to be the next big thing. Everyone's investing in it. At the same time, The Motley Fool is getting swept up in this.

Robert Brokamp: Right. We were going through it right along with everyone else. We've talked about this on previous episodes. I joined The Motley Fool in 1999, when we were at 150 employees. At one point we were over 400, and then things changed. By the time we were at the bottom, where were we, Rick? Like 70 people or so? Something like that?

And I'll say living through that that one thing that is a part of this, in terms of the stock market and how bad it got, is the Sept. 11 attacks happened in 2001. You could look at some things. For example, 2001, small-cap stocks actually did pretty well. It was the tech stocks that were suffering, but you could look elsewhere in the stock market and find good returns.

But then Sept. 11 came, and I think that changed a lot. I remember being in the company and David Gardner saying that there's some things you can't predict when you're running a business, and one of them is terrorist attacks.

Southwick: By law, are we also required to talk about the AOL-Time Warner (TWX) deal?

Brokamp: As we sit here in the Time Life building?

Southwick: It is. We are in the Time Life building, which is crazy. That feels like such an iconic moment of the dot-com bubble, too.

Brokamp: Right. Well, in 1999 AOL was the 10th biggest publicly traded company in the country.

Southwick: And we all had their floppy disks and CD ROMs.

Morgan Housel: "You've got mail!"

Southwick: You've Got Mail. It was a movie starring Tom Hanks and Meg Ryan. I mean, come on! They peaked! They peaked right there quite literally. So what made the bubble burst in addition to Sept. 11?

Housel: That's one of the big things, too. We're talking about the crash of '87 and even the crash of 1929, where there's not one specific event that you can pinpoint in the newspaper on the day the stock market peaked and said this is what caused it. Things kind of get out of control, and I think when enough people start to question what they're doing and enough people start whispering to their co-workers, and their cousins, and their neighbors, "Hey, this is starting to get pretty crazy."

I think those moods can shift pretty quickly. And then it just snowballs as fast in reverse as it did on the way up. So you don't need that much momentum on the way down before enough people throw in the towel, and then just as buying begets more buying on the way up, selling does the same thing on the way down.

So stocks peaked in March of 2000, and a lot of people have gone back and said, "Why March 2000? What happened at this time?" There's really not any specific event that triggered it beyond just people's moods and attitudes changing, and it wasn't until 18 or some odd months later that 9/11 hit.

That's a specific event, obviously, that took the economy and the stock market down to a whole other level, but before that it was really just a big change in moods. There were some events of companies that were going to go public and their IPO was canceled because there wasn't enough demand. But that in itself is triggered by the same change in investor moods. People start giving up at some point.