Usually, one doesn't open a time capsule after only one year. But given how much has changed since March 10, 2000, and how far we've fallen, it's worth revisiting -- to chart the hysteria, search for the warning signs and take away some lessons from the folly.
We all remember the cheerfully arrogant "greater fool" theory. Too bad the catchphrase now, especially in tech circles, is a reference to mass cult suicide -- yesterday's go-go investors and businesses talk about "drinking the Kool-aid," a ghoulish reference to Jim Jones and his followers in Guyana.
Below, we offer a survey of examples of the prevailing irrationality -- and some of the bearish voices drowned out in the frenzy -- leading up to the
Nasdaq peak on March 10, 2000. On that day the Comp reached as high as 5132.52 in intraday trading before closing at 5048.62. And by the way, though the
Dow has fared far better than the Nasdaq over the past year, it's worth remembering that it wasn't immune from the excesses of speculation.
Remember Dow 36,000? That was the idea, showcased in a
book of the same name, that the Dow had been vastly undervalued for decades, and could rise as high as 36,000 by sometime around 2005. As long ago as March '99, the proponents of the idea argued in The Wall Street Journal that vertiginous price-to-earnings reflected companies' fair value. "Investors are ignoring the old shibboleths and pricing companies like Gillette(G) at a P/E of 64 or Microsoft (MSFT) at a P/E of 66. This reflects not their nuttiness but their sanity," wrote James Glassman and Kevin Hassett. "Could it be that the model that Wall Street has been using to assess whether stocks are overvalued -- a model based largely on historic price-earnings ratios -- is deeply flawed?" they asked. "We think so." 
For at least another year, investors acted like they agreed with that argument. In December 1999, when
PaineWebber analyst Walter Piecyk slapped a $1,000 price target on
Qualcomm (QCOM), the stock shot from $503 a share to $659, up 31%. (After a 4-for-1 stock split the next day, the effective price target dropped to $250. Qualcomm recently traded at $58.19.)
Meanwhile, the indiscriminate embrace of the Internet was making inroads (or leaving potholes) in the English language. Remember the hugely irritating tendency of pundits to append the letter "e" to all forms of grammar? (E-loans, e-conferences, e-vote, etc.) In December 99,
TSC's own
Adam Lashinsky wrote a story in
Fortune about the "e-name game" -- how equity research analysts eager to capitalize on the Internet trend were transforming themselves from retail to "e-tail" specialists, or from enterprise software to e-commerce experts.
Fast forward: In a welcome return to equilibrium, the letter e has reverted to its former status as a blue-collar vowel. And none other than
Merrill Lynch analyst Henry Blodget, who gained fame for trumpeting money-losing start-ups, has launched coverage of Microsoft, a cornerstone of the profit-making establishment.
But not long ago, of course, the people most closely identified with Internet ventures were lauded as wide-shouldered visionary heroes. In 1999,
Time magazine awarded its "Man of the Year" title to
Amazon (AMZN) founder Jeff Bezos, whose company would respond by posting net losses of $1.4 billion in 2000. "Bezos is pathologically happy and infectiously enthusiastic," wrote
Time, describing a cheerful meeting with new employees. "300 employees leap to their feet as a boss on a p.a. system yells, 'Let's welcome Jeff Bezos!' They give him a standing O." After that rousing welcome,
Time reported, the workers handed up their white hardhats to be autographed.
More recently Amazon has been cast in a less worker-friendly light, enduring criticism for allegedly trying to put the kibosh on unionizing drives.
To their credit, plenty of old-timers continued to harp on time-honored investment themes, warning of the need to diversify and be prepared for sizable market drops. Burton Malkiel, author of the legendary
A Random Walk Down Wall Street, told
Fortune in December '99 that the Internet was "clearly a speculative bubble -- dangerously close to the boom in biotechnology stocks of a decade ago, the Nifty Fifty boom of the early 1970s, and the bubble in Japanese stocks that ended in 1990. I think it's going to come to a very bad end." He advised investors who were nervous about the market to consider diversifying into corporate bonds or tax-free municipals.
And no wonder, given the fast-and-loose ethos that had taken hold among public companies. Even reputable businesses like
Intel(INTC) were jacking up earnings with the
proceeds from their investment portfolio -- a strategy likely to haunt them in coming quarters, given what will be tough year-on-year comparisons.
In another symbol of the stampede-to-market mentality, tech junkies dumping scads of money into hot funds forced some of the most popular to slam shut their doors to new accounts -- but not before panicked investors had flooded them with even more new money. Investors poured an astonishing $1.5 billion into
(JAGTX)Janus Global Technology in January 2000, the month it closed, wowed by the fund's triple-digit gains in 1999. That followed on the previous month's massive inflows of $1.1 billion. By comparison, the fund took in $287 million in January 1999, just after it had opened. The tide has now turned: In January 2001, Janus Global Tech had net outflows of $67.4 million.
At its peak price in February 2000, before it merged with Lycos, Spanish-based Terra Networks, an ISP and operator of many Web portals, was valued at a whopping $40 billion. That market cap is greater than the current valuation of
General Motors (GM) ($31.9 billion). Now, with its stock price having nose-dived 91%, from a high of $145.25 to $12.50,
Terra Lycos (TRLY) is valued at $3.4 billion, according to
Morningstar. In its most recent quarter, the rechristened Terra Lycos still hadn't shown a profit.
Of course, even in the good times plenty of individual investors lost money in the markets through daytrading. In February 2000, a Senate investigatory committee issued a report critical of the fast-growing industry. Based on a study of 15 daytrading firms, the report concluded that the average daytrader would have to generate a trading profit of more than $111,000 to achieve profitability for the year. (That estimate assumes that the average daytrader executes 29 trades per day at an average commission of $16 per trade.) "The best evidence suggests that a significant majority of all daytraders -- more than 75% -- lose money, and that for novice, undercapitalized traders, there is almost no chance of success," wrote the Senate committee. That news came too late for a lot of people.
But the Senate committee's timing wasn't nearly as bad as that of
Prudential chief technical analyst Ralph Acampora. On March 10, the day of the peak, Acampora forecast that the Nasdaq could surpass 6000 in the next 12 to 18 months. Whoops. The following Monday the Comp teetered and dropped as much as 205 during trading, closing down 141.
Wednesday, the Nasdaq closed at 2223.92, down 56% from last year's high.
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