Saturday, March 10, 2007

The Bubbleversary

On March 9, 2000, the NASDAQ stock index hit 5048.62. On March 10, 2000, it began a downward slide from which it has never recovered. On Friday, the NASDAQ closed at 2,387.55, which is a great improvement over 1300 where it sat in September of 2002.

The NASDAQ increased over 500% in the five years leading up to 2000. It had pretty consistently returned 60-70% every five years for the several five year periods before that. There was a lot of talk at the time that things were "fundamentally different". Now it really only matters that large institutional investors thought that, because they move the market. Individual investors really don't have a lot of power to nudge it.

But even if they didn't have market moving power, individuals could still get themselves in a lot of trouble. I remember people who had no business investing in stocks, talking crazy. I remember hearing people say that a stock sounded cheap because it was priced at $10 per share, without any regard for the number of shares outstanding or what that implied about the value of the company. Much less did they try to evaluate the profit the company might return in the future, and what share of that profit their $10 got them.

I remember people buying stock because it was about to split, and they were sure people would buy more stock after it split, driving the price up. They didn't consider that a) a split doesn't change the value of the company and b) even if it did, we ALL knew the stock was splitting, and if it was really that simple a lot of people would have beaten them to the punch.

Anyway, happy anniversary. Did we learn anything? I don't think so. The way I've heard people talk about real estate over the last five years, I'm pretty sure we did the same damned thing just a couple of years later -- people who knew nothing about real estate talking about it "knowingly" like they were Conrad Hilton. Many people think the reckoning has come, but it certainly hasn't felt like a reckoning to me. NASDAQ 2000-2002: now that was a reckoning.