The Dot-com Bubble and the Nasdaq's -78%
The saying "the internet will change the world" ultimately became true. So why did the people who believed it and invested suffer a -78% crash? A correct story and a correct price are different things.
The Era When Just Adding 'Dot-com' Made Prices Rise
In the late 1990s, along with the internet frenzy, there was a period when just adding ".com" to a name sent a stock soaring. Companies with hardly any profit — or even revenue — were granted astronomical valuations on "future potential" alone.
Riding this fervor, the tech-heavy Nasdaq Composite soared to a closing price of 5,048.62 on March 10, 2000. Many people believed "this time is different" and that it was the start of a new era.
A Collapse of About -78%
The bubble soon burst. Once investors realized "most of these companies don't actually make money," the Nasdaq fell steadily from 2000 to 2002. On October 4, 2002, the Nasdaq dropped to 1,139.90 — about -78% below its high.
Countless dot-com companies were delisted or went bankrupt. The premium paid for "potential" evaporated entirely.
To recover your principal from a -78% decline, you need a gain of about +355% (roughly 4.5x). The larger the drop, the more sharply the burden of recovery grows.
About 15 Years to Recover
The Nasdaq surpassed its 2000 high again only on April 24, 2015. That is about 15 years. Interestingly, the big picture of the internet ultimately proved correct. The internet did change the world, and giant tech companies emerged.
But "the direction is right" and "this price is appropriate right now" are entirely different matters. The lesson of the dot-com bubble is that even if you believed in the right future, buying at bubble prices can force you to wait 15 years.
よくある質問
Q. The internet really did change the world, so why did it crash?
Because an industry's success and an individual investor's return are separate. The internet industry grew, but most of the companies that listed in its early days did not survive, and even those that survived were priced far too expensively at the time. It shows that "even if the story is right, if the price is wrong you lose."
Q. Is today's tech rally also a bubble?
Declaring whether the market at a specific point is a bubble is the realm of prediction, so this article does not address it. However, the habit of asking yourself "how far has the growth narrative been priced ahead into the valuation" is valid in any era.
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