Bubble's Gone, but Bubble Thinking Still Distorts This Market

When people talk about how a lack of visibility has made investing difficult, they are usually talking about the future. In an uncertain economic environment, it is hard to know when corporate profits will start to recover, and how far they will fall beforehand.

But what happened in the past has just as much to do with the increasingly tricky investment environment. Both the inflating and the bursting of the high-tech bubble -- considering a just-concluded first quarter in which the Nasdaq lost a quarter of its value -- have continued to distort how people view this market.

"It ruined a lot of our models," admits Merrill Lynch quantitative strategist Rich Bernstein. The rules of thumb that many investors used as a guide got turned on their head by the Nasdaq bubble, and many of them have yet to right themselves.

Cause and Effect

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