It takes little more than the recollection of the terrorist attacks on Sept. 11, 2001, to know that 2001 was a tremendously painful year. The dot-com bubble started to deflate in 2000, and by 2001 it had become clear that there would be many more losers than winners in the space, as the economy teetered on the brink of recession. Indeed, according to the National Bureau of Economic Research, that recession lasted from March 2001 until its trough the following November.
The Sept. 11 terrorist attacks exacerbated an already serious situation, of course. The stock market took a record nosedive when trading resumed several days after the attacks, as investors made their nervousness known. It was almost like a perfect storm of economic pessimism, as many corporations cut workers against the backdrop of frightened consumers who wanted little more than to cocoon. Unemployment reached 5.8% in December 2001, its highest level in six years.
Those were difficult times, all right. Indeed, 2001 separated strong, solid companies with sustainable business models from weak, unsustainable businesses. Investors learned some powerful (if painful) lessons, too -- cash, profitability, and sustainable competitive advantages all still mattered. Good ideas and dot-com suffixes didn't make suitable investing theses, which became increasingly clear as the great shakeout continued.
Separating the wheat from the chaff
Let's revisit some of the companies with the headiest investor followings, the most stratospheric share prices -- and, by and large, the most tragic demises. Pets.com springs to mind; its most valuable asset may have been its mascot, that darn sock puppet, because it certainly didn't have competitive sustainable advantage.
What about Kozmo.com? Mortgage.com? Theglobe.com? Drkoop.com? Surely some of these ring a bell. Investors considered all these companies great ideas, but in the long run, they simply couldn't live up to investors' overzealous expectations, nor (in most cases) survive as going concerns.
Yet certain companies set themselves apart, proving that they were strong, well-run, innovative businesses that could profitably generate tons of revenues. Their survival in such a difficult, recessionary time proved the point even more. There were indeed vast opportunities in the nascent world of Internet stocks -- but only a few, not the multitudes of Internet IPOs that enflamed investors' greed.
If you want a refresher on the dot-com madness that gripped investors in the late '90s, many would argue that you should look no further than Google
A lot has changed in the past five years. The Internet has become a necessary utility in most households. High-speed Internet access and exponentially faster computers have made more products and services available than were ready for prime time back in 2001. Furthermore, Internet advertising has found its true calling with the help of Google, with targeted advertising becoming an important, even disruptive, innovation.
The Internet has entered its next phase, which some have dubbed "Web 2.0." Although some people argue that Web 2.0 doesn't really exist -- that it's merely a marketing slogan hyping the logical progression of the Net -- evolution is doubtlessly and rapidly taking place. Consumers are no longer passive, and Internet users are taking increasing control of content. Community is power. The promise of democratization seems to be coming to fruition as Internet users themselves create some of the hottest content around. They often circumvent traditional marketers, driving their own demand for information, products, and services.
Of course, some people theorize that version 2.0 of the dot-com bubble is also afoot, manifested now by acquisitions and venture capital investments rather than hot IPOs. Many such start-ups have been forming (think Wikipedia, Digg, and YouTube), and some are being snapped up by Internet giants. Think eBay's purchase of Skype, Yahoo!'s purchase of Flickr and del.icio.us, and News Corp.'s
The past is prologue, hindsight is 20/20, and looking back is the best way to move forward. There's nothing wrong with getting excited for the future; the Internet remains just as exciting and dynamic as in those crazy days prior to 2001. Let's hope that the lessons we've learned from the terrible year that followed have given us a bit more caution -- and wisdom.
Amazon.com, Yahoo!, and eBay are Motley Fool Stock Advisor recommendations. To find out what other companies David and Tom Gardner have recommended for subscribers since April 2002, try Stock Advisor free for 30 days.
Alyce Lomax does not own shares of any of the companies mentioned.