Lessons from the Dot-Com Bubble!

Between 1995 and 2001, a speculative bubble known as the “dot-com bubble” occurred, during which time the stock market soared significantly from the growth of the technology and internet sector, IPO’s were all the rage and the sky was the limit for stock prices. Bubbles like this have occurred right through history: in the 1840s, for example, frenzied buying in the field of railway building lead to a stock market bubble which burst devastatingly in the 1850s. The result in 2001 after the dot-com bubble burst was a mild but long-term recession in the Western world.


Most people believed that we had entered a new world and the internet was going to become the future of business. However, reality set in and all the hype didn’t live up to its promise and the inevitable occurred, the stock market crashed.


If you look deeper into stock market crashes you will find an abundance of timeless lessons that in my opinion every investor should learn. The three main lessons that we learned from the dot-com bubble are: Fundamentals don’t lie; trading the stock market momentum in fun, but we need to remember it is just momentum; life-altering changes, such as new worlds, don’t happen overnight.


After the bubble burst, many dot-com’s were either acquired by other companies or they liquidated. A few larger dot-com companies survived: Google and Amazon are good examples. According to a number of sources, about 50% of dot-com’s survived. Unfortunately, there were still thousands of technical experts such as programmers and web designers who were laid off and found themselves in a highly competitive job market.


Following in the footprints of the then US central bank chairman Alan Greenspan, Mr. Buffett said that the “irrational exuberance” which occupied the stock market between 1995 and 2001 left investors expecting unrealistic returns. Mr. Buffett famously said “The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them.”


There has been extensive academic research into the dot-com bubble and after looking at the dot-com bubble from an investor’s perspective I am now going to undertake an examination of it from the academic viewpoint.