Making Money in Technology
After the Bubble, page 5

The Post-Bubble Landscape

The great Internet and technology bubble of the ending years of the twentieth century will be remembered in history as one of the greatest speculative bubbles of all times. From its peak on March 20, 2000 to early April 2001, the NASDAQ large-capitalization market (as measured by the NASDAQ 100, trading under the symbol QQQ) declined almost 70%, with a huge related loss in the trillions of dollars. According to the Wall Street Journal, the NASDAQ lost a little more than $3 trillion in market capitalization between April 2000 and February 2001.

The year 1999 was the best in history for the venture funding of new ventures. By early 2001 the tide had turned, and almost no new ventures were being funded. Furthermore, many of the ventures funded during the bubble had already closed their doors.

The post-bubble landscape is a brave new world. We do not understand it yet, or know how long it will last. How is money best made in technology in the new environment? What kinds of ventures will succeed? In order to answer these questions, we must first understand what the bubble was, and what caused it to burst.

What Was the Bubble?

Any speculative bubble—whether it is in tulips, South Seas securities, or NASDAQ technology stocks-- can probably best be described as frenzied momentum investing. Momentum investors buy stocks because they believe the stock price will be higher tomorrow than today—not because of any interest or understanding of the fundamental valuations supporting the stock prices. Another way of putting this is that momentum investors buy stocks because they are going up.

In all fairness, when markets go up, momentum investing generally works. However, by late 1999 and early 2000, things had reached a state where “blue chip” technology stocks were valued way above historical norms. We were told that a “new era” had dawned and that conventional metrics did not apply. For example, prominent analyst Henry Blodgett based an optimistic price prediction for on-line retailer Amazon on “new ways of measurement.” Amazon duly rose to the giddy price predicted by the analyst, and a new verb was coined: to “blodgett” a stock.

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