Dot Com Mania –
"I am not so much concerned with the return on capital as I am with the
return of capital."
Will Rogers, 1930’s.
the best of plans and the worst of plans. During the late 1990’s and going
into the new millennium, it seemed that the smartest and only way to make a
high return on an investment was to catch a ride on the wild dot-com
train. Everything connected with the Internet was Hot.
capitalists and bankers were investing in Internet start-ups based on excel
spreadsheet projections and a dot com in the company’s name. Entrepreneurs
enthusiastically set up web-based enterprises selling everything from
infrastructure, services, domain names, advertising, toys, graphics, and
just about anything else one could imagine. Instead of a pick axe, gold pan
and a Jackass like in the Gold Rush, the tools of the trade were computers,
domain names, high-speed connections, software and investors who felt like a
The old businesses that were not
adapting to the Internet were being punished in their stock prices. They
were referred to Brick based businesses vs the New Internet
businesses that were called Click based businesses. The Click based
stocks were skyrocketing while the Brick based stocks were flat to down.
Many estores sold products for less than they paid for them, betting that
would attract new customers and build loyalty for the future. When the
economics didn’t make sense in the core business model, everyone felt that
advertising revenues would bail them out.
In little over a year at the top market for technology
shares in 1999, the Nasdaq, gained 128%. The spectacular stock market gains
of Internet firms with little revenue and no profits drove many experts to
despair. One of the most successful investors, Julian Robertson, closed down
his Tiger hedge fund, saying he could not understand the markets anymore.
The old rules didn’t seem to apply. Companies were being valued on future
projected cash flows at extremely high multiples (50 to 200 times), vs the
old fashion method based upon actual cash flow of 7 to 15 times. In 1999,
there were 546 IPO’s raising over $69 Billion. The average first-day gains
of IPO’s in 1999 were 68 percent compared to the prior year of 23 percent.
Success was not measured in return on capital or return of
capital, but rather in raising capital from investors.
Unfortunately, in 2000 the Internet bubble burst. Stock prices plunged,
investors lost confidence, and web based businesses started closing down by
the minute. Many paper millionaires lost everything including their jobs.
Click based employees went back to their old Brick based jobs with wild
stories of wasted money, lavish parties and ridiculous business plans. Who
would have thunk history could have repeated itself?
The bursting of the dot-com bubble
resembled other episodes of unreasonable speculation in financial history.
The common factor seems to be normal business minded people get carried away
with a good idea and the fear they will miss out if they don’t invest.
One of the
more infamous of the speculative bubbles in history was the Dutch tulip
craze in the seventeenth century. Tulips were beautiful and scarce, and a
symbol of class and status. Demand skyrocketed and so did the price. Tulip
options were traded on the Dutch stock market and no one wanted to miss this
once in a lifetime opportunity.
At the peak
of the market in 1635, one tulip bulb was worth the equivalent of $35,000 in
today’s dollars. Buyers were selling their life savings just to own a one
tulip bulb. They though it was a safe investment that would continue to go
up in value.
burst in 1636 when investors started selling, and prices tumbled. Many
investors lost confidence in the market and there was panic selling. Prices
continued to crash down to less than a dollar in today’s money. Many people
were ruined and the Dutch economy went into a recession for many years that
famous episode was the South Sea Bubble in England. In 1711, the British
government granted the South Sea Company a monopoly on trade in the
Americas, and this proved irresistible to investors, who seemed not to
notice that the Americas were controlled by Spain. The price of shares rose
rapidly but the company never made a profit. The crash started around 1720.
examples include the Railroads in the 1870’s, Florida real estate craze in
the 1920s, and the U.S. stock market crashes of 1929 and 1987…. now we can
add the Dot Com Bubble.
This is a
modern day Scripophily Collector’s dream. You have to take notice when the
paper a company’s stock is printed on is worth more than the company’s stock
many Dot Com’s were worth more dead than alive…