The faint round of applause heard last week on Wall Street was for the NASDAQ Composite Index finally poking above the 5,000 mark on March 2. The last time the index was over 5,000 was 15 years ago, at the peak of the tech stock bubble.
The NASDAQ on March 10, 2000, reached its intraday high of 5,132. This was a true market bubble worthy of inclusion in Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds.” Many stock investors would like to forget that period of time and the vast sums of money lost. Yet valuable lessons can be learned from studying this textbook case of market irrationality. Santayana’s warning—“Those who cannot remember the past are condemned to repeat it”—still applies.
The stock market had been on a tear since 1995, and tech stocks really poured it on in 1999, with the NASDAQ that year rocketing 85.6 percent. The exceptional returns and apparent ease of making money attracted more and more people and their money into the stock market. Conjuring up memories of shoe-shine boys giving stock tips in 1929, there were stories of people quitting jobs to become day traders.
In classic bubble fashion, February 2000 saw the largest inflow of cash into mutual funds ever recorded in a month. After the NASDAQ hit its March peak, the index quickly rolled over and began its devastating three-year decline. From 2000 through 2002, the index suffered losses of 39 percent, 21 percent and 31 percent, respectively.
A few market participants scored big gains during that stretch. There was investment banker Frank Quattrone, who became the go-to banker to get your tech IPO sold to the public. Mutual funds and others who were “friends of Frank” received favored allocations of hot IPOs that would leap in price instantaneously. Quattrone later dodged government efforts to prosecute his transgressions.
We likely wouldn’t know who Mark Cuban is if he hadn’t hit the sell button and sold his Internet startup Broadcast.com to Yahoo! for $5.7 billion in stock in 1999. Cuban then made another astute move by immediately selling most of his Yahoo! stock, which subsequently dropped from $110 per share to $7 in 2001, preserving his newfound wealth.
Our staid local utility IPL also proved an agile tech stock investor. IPL’s non-regulated holding company bought 1 million shares of Internet Capital Group at $1.16 each in early 1999 and sold them a year later for $113.17 per share, for a gain of $112 million!
The NASDAQ today is much different than 15 years ago. Then, the index sported a stratospheric price-to-earnings ratio exceeding 100, whereas today the index carries a 23 PE ratio. Apple Inc. wasn’t even in the top 20 largest companies in the NASDAQ, but following Apple’s explosive growth, it now represents 10 percent of the entire index. Cisco Systems, an investor darling during the tech bubble, had a PE of 127 in 2000 compared with a 13 PE today and is still 63 percent below its high price 15 years ago. Google wasn’t even a public company but is now the third-largest company in the NASDAQ index at $340 billion.
It took 15 years, but welcome back, NASDAQ!•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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