Five years after that era ended, causing billions in losses and shattering dreams, many investors are still wary of tech stocks.
CHICAGO — When Jeff Ryan thinks back about the days of the tech-stock mania, he remembers a couple who owned a carpet business being interviewed on TV.
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They had their savings invested in technology stocks. When asked why they selected one of the firms in their portfolio, they responded that they didn’t know what it did, but they liked the name, said Ryan, a senior research analyst at the Charles Schwab investment firm.
“You just knew at that point that something was wrong,” Ryan said. “That’s not a sound foundation for buying stocks.”
Oh, those heady days when faith trumped reason: Clicks and eyeballs mattered, not revenues and profits; day traders abounded; and everyone was going to be a tech-stock millionaire.
The bubble burst, as they inevitably do, and that era ended with a resounding thud, billions in losses and countless shattered dreams.
Yesterday, the Nasdaq composite index reaches the fifth anniversary of its first, euphoric close above 5,000, and today, it marks five years since it reached its all-time closing high of 5,048.62.
The Nasdaq bubble then exploded spectacularly, if not all at once: Four months after the peak, the index was still trading at nearly 4,300. But the bottom quickly fell out, and a year after the record close, it was down 59 percent, at just over 2,050.
When it struck bottom on Oct. 9, 2002, at 1,114.11, the Nasdaq had lost 78 percent of its value, though it has recovered 86 percent since. But its close of 2,061.29 yesterday leaves it almost 60 percent below the record.
While the Nasdaq Stock Market lists only about a quarter of the publicly traded companies in the United States, it took on disproportionate importance in the late 1990s. Some of the biggest initial public offerings in history — many of which ended up discarded, bought or dismantled — were done on the Nasdaq.
Blue chips, meanwhile, have not fared as bad.
After the Dow hit its record-high close of nearly 11,723 in January 2000, it fell nearly 38 percent to its subsequent low but has been pushing back toward the 11,000 mark of late. Yesterday’s close of 10,805.62 is only 7.8 percent below its all-time high.
Under the circumstances, it’s probably no surprise that many investors are wary of tech stocks.
“I would like to believe they have gotten gun-shy to the extent that people have been burned by that,” Ryan said. “I think that they may be more cautious about jumping back into equities.”
Although tech stocks have had a strong run since hitting bottom, David Joy, capital-markets strategist for American Express Financial Advisors, says investors haven’t forgotten the pain of the bubble — at least for the time being.
“I really think that the lessons have lingered,” he said. “I don’t think enough time has gone by for us to unlearn all these lessons yet.”
The principal one, Joy and others say, is that stock valuations matter, even in a roaring economy and a revolution as powerful as the Internet.
“We knew we were on to something big. But we didn’t know who the winners and losers were going to be,” Joy said.
“I don’t blame investors for looking in these directions at the time. But what they maybe could be blamed for was suspending the time-honored rules of valuation.”
Ryan said the idea that the Internet changed everything had a powerful effect on investors.
“Part of it was this optimism that accompanies any technology as it becomes widely adopted,” he said. “You heard way too many people talk about that as if it changed the idea that cash is cash. It didn’t.”
Why tech investors allowed themselves to get into this mess in the first place is still debated. It is, of course, hard to recognize a bubble until it bursts.
DePaul University professor Werner De Bondt, a leading expert in the field of behavioral finance and asset bubbles, identifies certain characteristics of individual investors that may help explain why they were susceptible to the tech-stock frenzy.
His research suggests investors expect past price changes to continue, have a bias toward optimism and overconfidence, and persevere in their attitudes, filtering information to conform with what they already believe.
These tend to take hold, he said, after a development that justifies a certain amount of optimism, but they are followed by a rush of relatively unsophisticated investors into the market, which is a sign the bubble may be peaking.
“Once the market takes off, it typically pulls in millions of new investors,” he said. “There’s a very big herd mentality at the end.”
Other experts point to that follow-the-pack mentality — when rising prices lead to more demand and, therefore, rising prices — as a factor in inflating the bubble.
“You just kept seeing prices rise, and no one wanted to be left behind,” Joy said.
Why the bubble burst, however, is an open question. There’s no single dramatic, market-altering event to point to, experts said.
“I think that’s a tough question. That’s what everyone wants to know,” De Bondt said. “To literally pinpoint it, that would be fantastic, obviously.”
One question asked by some experts: Yes, prices collapsed, but was it a true bubble in the first place?
“The word ‘bubble’ is used so loosely by people,” said Ellen McGrattan, an economist with the Federal Reserve Bank of Minneapolis.
She and Nobel Prize-winning economist Edward Prescott have conducted research suggesting that, in theory, the stock market was not overvalued in 2000, because the market value of corporate equity and the market value of their productive assets were roughly equal relative to gross national product.
Their research also indicates the market was slightly undervalued at the time of the 1929 crash.
Why stocks subsequently imploded remains a bit of a puzzle.
“No one has yet come up with a good model for why we see very large crashes and recoveries,” McGrattan said. “We really don’t have an understanding of that.”
Information about how many companies are listed on Nasdaq was provided by
The Associated Press.