Tech is hot, and the stock market behaved like the dot.com bubble of 2000.
The COVID-19 pandemic pushed our dependency on tech to new heights: for a while, we worked, ate, and entertained remotely, segregated at homes.
More tech companies are planning IPOs than ever, making founders and employees into millionaires overnight, until everything crashed.
Are we in another Dot.com bubble already? When will this stock bubble finish bursting? And more importantly, how can we protect ourselves? Read on to learn about the Dot.com bubble and how to survive it.
What is a Tech (Dot.com) Bubble?
A bubble refers to the soap bubbles children love. To make a bubble, you blow air through a thin layer of soap; it magically gets larger until it can’t get any larger and suddenly bursts.
The word “bubble” in the stock market world refers to a similar situation. Stock prices keeps rising until it can’t anymore, and then everything collapses.
In a stock market bubble, investors buy because they think other investors are also buying, all driving prices higher without regard to reality.
The most recent example of the bubble is the 2000 stock market crash, that is, until 2022.
In 2000, the NASDAQ Composite Index rose 580% from January 1995 to March 2000. But by October of 2002, or two years after the peak, the NASDAQ index had fallen 78%.
The Losers of the 2000 Tech (Dot.com) Bubble
Some of the biggest losers in the 2000 dot.com bubble were the hottest dot.com companies at the time, including Yahoo!
Yahoo’s shares appreciated 1,400% in four years, and then lost most of it two years later. Ouch!
Yahoo might sound like a weak company today, but it was the hottest company back in its day. Yahoo was Netflix, Google, and Facebook combined because it had entertainment, search, and social.
The best and brightest worked at Yahoo, the most ambitious and creative were there too.
Everybody with a computer was visiting Yahoo all around the world.
Yahoo got even more dominant after acquiring Geocities for $3.56B. At the time, Geocities was the 3rd most visited site on the internet.
By the way, you saw in 2012 that Yahoo’s stock increased a tiny bit, but that was only because its founder, Jerry Yang, bought a 40% stake in Alibaba, which later became a tech giant in China.
So Yahoo had it easy. Other tech companies had it even worse.
Pets.com, for example, went from a massive IPO to bankruptcy in one year.
The idea of Pets.com is Chewy.com today. Pets.com was so popular that its balloon even walked in the 1999 Macy’s Thanksgiving Day Parade.
But since the IPO, the company kept losing money until it sold assets to pay back its investors.
And eventually, the company went bankrupt. At the peak, Pets.com was trading at $14. A year later, it was trading at $0.19 in bankruptcy. Enthusiastic investors lost ALL of their money.
Survivors of the 2000 Tech (Dot.com) Bubble
Cisco and Intel were considered the golden tech of its day, with technologies that defined and created new industries.
Both Cisco and Intel survived the 2000 tech bubble. In some ways, they are still successful companies making billions of dollars and employing thousands.
They are the rare survivors of a tech bubble!
But 20 years after the dot.com bubble, their stocks STILL have not recovered.
Cisco, for example, reached the peak price of $79 in 2000. Its stock price after the 2020 pandemic stock appreciation has not exceeded $60, and since 2022, it’s fallen back to the $45 range.
Similarly, Intel continued to dominate in the hardware chip space. But its stock never fully recovered the peak of $73. After 2022, it stayed at below $40.
Winners of the Dot.com Bubble
Not every stock died or barely survived during the 2000 dot.com era.
Some emerged from the ashes and went on to do even more unbelievable things.
Of the FAANG companies of today – Facebook, Apple, Amazon, Netflix, and Google, only Amazon and Apple existed in 2000.
Both Amazon and Apple suffered during the 2000 dot.com bubble, but their stock dip back then is barely noticeable compared to the meteoric rise since.
Amazon, for example, went IPO in 1997. Its stock reached $107 at the peak of the dot.com bubble and then crashed to as low as $10 in 2001.
Amazon was losing money really badly in 2001 and almost went bankrupt.
But the company made it through. And since then, the Amazon stock has grown to over $3,000 in 2021, making the dot.com loss from $107 to $10 barely noticeable. Even after the 2022 dot.com crash, and a 20-to-1 stock split, Amazon’s stock today is still 20 times HIGHER than the 2000 PEAK of $107.
And Apple and Microsoft not only survived the dot.com crash they thrived to become the most valuable companies in the world with trillion-dollar valuations.
What Causes the Dot.com Bubble?
There are many reasons why the stock market crashes, and we’ve covered most of the scenarios in my original Stock Market Crash post here.
For the dot.com crashes, there’s a lot of evidence that the dot.com bubble is an example of the stock market behaving irrationally.
Robert Shiller, a famous Yale economist, wrote in his book “The Irrational Exuberance” that as the bull market develops, it can generate optimism about the future, and the optimism can become so irrational that it stimulates irrational demand and prices.
In other words, as people make money off of their investments, they become even more confident of their ability to make even more money in the future that eventually, they stop looking at facts.
Until one day the bubble bursted.
Indeed, the dot.com bubble is a classic example of irrational exuberance.
Is the Next Dot.com Bubble Crash Here Already?
One of the best ways to measure if the next crash is coming is to look at market’s irrational exuberance.
In other words, let’s look at the price of stocks relative to their earnings. Or, is the stock price getting higher despite companies not making too much money?
The same economist Robert Shiller created a metric called the Shiller PE ratio to measure the level of irrational exuberance in the market today.
From multpl.com, I got the following graph for the Shiller PE ratio.
You can see that the Shiller PE ratio is high today, even after dropped substantially in 2022 – we are still hovering around the Black Tuesday of 1929 level, though lover than the all-time highs near the 2000 dot.com era.
How Long Until the Worst of the Crash is Over?
In some sense, we should expect the Shiller PE ratio to be fluctuating around 30s for quite a while because companies in tech today might lose money for quite some time before making money.
Amazon struggled for decades to become profitable before finally creating the kind of ecosystem to dominate industries.
But how large is too large? Are we at the edge of yet more nose dives as 2022 dot.com bubble continues to unravel?
Will the market dip this year, or will it like 2000 when the market will not bottom out until 2024?
The truth is nobody knows.
Many people thought the market would crash in 2016, and then more thought it was going to crash in 2020 and 2022.
While stocks certainly went back to “normal” in 2022. We are barely crashing.
Some people also pulled their money out during the pandemic and lost big during its subsequent recovery.
Stock market is volatile today, but if you pull your money out assuming the market will continue to crash, what happens if it recovers?
The Pandemic Unraveling of 2022
The pandemic has fundamentally changed the way we live, and with it, technological progress that was supposed to take ten years became a reality in two months.
I’m talking Americans suddenly buying anything online, from pet food (Chewy), household items (Amazon), exercise equipment (Peloton), furniture (Wayfair) to cars (Carvana). And with it, companies that sold these things online saw their stocks peak multiple times above during the pandemic, and then subsequently crash to nothing in the year when life started to get back to “normal”.
Just look at these pandemic darlings below and how their stocks spiked during the pandemic. Every single one of these companies thought pandemic permanently altered human behavior, and that the world will never go back to before again.
Peloton, which sold at-home exercise bicycles and treadmills, said that they will forever replace community gyms and become the Apple (Apple!) for health & fitness. Alas, a year after the pandemic when COVID is technically still not over and infecting everyone, their stock tanked 94% to lower EVER before.
Carvana sold used cars online. When the Pandemic disrupted supply chain and caused a slowdown in new car production during a time when people are afraid of taking public transit and preferred driving, their stock bloomed.
But faster than you can say unicorn, the stock is now down 93% from the peak. Back to reality.
The New Normal vs. Back to Normal
From medicine (Moderna) to communications (Zoom) to payment (Affirm), we all thought the pandemic has ushered in a new era of life, one that is all about virtual interactions and doing everything at home.
But that turned out to be false.
Moderna, whose vaccine saved lives and will continue to innovate in mRNA medicine to treat diseases, still saw a 60% decline in its stock price.
Zoom – in an era where many people will continue to permanently work remotely, also say a 78% decline in stock price.
We didn’t have an new normal. We went back to the old normal.
And with the end of the pandemic, the fever on pandemic stocks crashed.
How to Prepare for the Next Tech Crash?
There are ways you can still prepare for this next Dot.com bubble crash.
1. Invest Most Money In Index Funds
Looking back in history, here are the facts:
- If you had invested in Yahoo, Cisco, or Intel, you would’ve lost some of your money.
- Had you invested in the hottest IPO stocks, such as Pets.com, you would’ve lost all of your money.
- If you had invested in Apple, every $1 you put in would’ve been $500 today.
- Had you invested in Amazon, a struggling online book store, every $1,000 invested would be $1 million today.
The question is – can you predicate which company is the Yahoo of today and the Amazon of tomorrow?
Remember how hot Netflix was for the longest time, ever? It was so hot, it can’t possibly tank, right?
Well in less less than six months, Netflix crashed 73%, going back to its price in 2017.
In ten years, some unknown startup could come out of nowhere to beat Google or Facebook.
Are you confident that you can stock pick the winners and avoid the losers? I can’t.
So for most of my money, I put it in the U.S. stock market index funds.
NASDAQ Composite Index
Even if you had invested in a technology index fund, such as the NASDAQ composite index, you would’ve still made money. But only if you had a lot of patience.
The chart below shows that the Dot-Com crash completely erased the NASDAQ gains in 2000, and this technology index took 14 years (2014) to recover back to its peak in 2000.
But only five years after, it doubled in 2020, another year to 3x from 2000 in 2021, before promptly crashing 20% in just the first half of 2022.
In fact, the NASDAQ is still beating the S&P 500, the Russell 2000, the Dow Jones, and the FTSE 100 index, even after the 2022 crash thus far.
After all, the NASDAQ is betting on technology, and technology has dramatically overtaken our lives today.
But what does the future look like in a post-pandemic world? Will technology continue to outperform other sectors, or will the tech bubble continue to burst?
We don’t know.
My advice? If you like technology, buy some NASDAQ index funds, but don’t put the majority of your money into a single sector no matter how much you think it’s going to take over the world.
And if you want to stock pick, do that with less than 10% of your net worth only.
As long as you invest in broad index funds that span across the entire stock market, you will be fine.
2. Don’t Try to Time the Dot.com Bubble Crash
If a crash is inevitable and still has yet to bottom out, why can’t we sell everything now? Wait until the crash to buy at the bottom?
Well, the problem with this strategy is that you don’t know when the crash will happen.
For example, back in the 1990s, the market was already technically overvalued in 1995. By 1996, many people were worried about a tech bubble bursting.
In 1996, the NASDAQ index price was about $1,000. But it would take another four years, with the price 4x-ing to $4,000, before the bubble would finally burst.
So had you pulled out your money in 1996, you would’ve lost out on 400% of gains and would need to wait for seven years from 1996 until 2003 to justify reinvesting!
So keep investing, and trust the stock market will always go up.
3. Don’t Day Trade with Robinhood
Look: losses can hurt a lot more than your gains can feel good.
Research has shown that seven of the best ten days of stock performance occurred within two weeks of the ten worst days.
The best days of stock performance occur right after the worst days.
And the second-worst day of 2020 – March 12th – was immediately followed by the second-best day – March 13th.
It means that if you missed out on a few days that happen to be the best performing days, you could lose big.
JP Morgan published a study that showed that while the annual return of the S&P 500 from 2001 to 2020 is 7.47%, if you were out of the stock market during the 10 best days, your return would’ve tanked to only 3.35%.
Are you missing out on the best 20 days? Keep your money in the stock market!
Day trading loses money in the long run, big time.
4. Have One Year Worth of Emergency Fund
Last but not least, you need to diversify and protect against the worst scenarios.
To diversify, make sure you have your investment in various funds, from NASDAQ to the S&P 500 to the entire U.S. stock market.
To protect against the worst-case scenario, make sure you have one-year worth of expenses saved in cash. This way, you won’t be forced to withdraw your stocks even after a layoff.
Remember: when the stock market crashes, you want to keep that money in the stock market because the stock market will rise.
But you can’t do that if you also lose your job and simultaneously need money to pay for your mortgage or to eat.
Dot.com Bubble: Summary
We know irrational exuberance creates dot.com bubbles.
In some sense, it feels like the tech rush of today is at the cusp of another dot.com bubble crash.
Today, the hottest stocks are Amazon, Facebook, Netflix, Google, Microsoft, and Apple.
Already, Netflix has fallen out of favor.
Who will be the hottest stocks in 20 years? We don’t know.
Remember what happened to Yahoo and Pets.com? Don’t put all of your money into the best stocks of today, no matter how hot they are!
But no matter when the dot.com bubble will burst, you should always behave the same: that is, diversify your investment portfolio to both tech and non-tech stocks in index funds.
Never day-trade because you might miss out on the few days where gains count.
Lastly, have lots of cash – at least one year’s worth, and when things are crash, STAY IN THE MARKET. It’s not a loss until you sell the stock, and then most likely you will miss the road of stocks going back up.
How much house can you really afford? Read the 2-series guide: How Much House Can I Afford for FI/RE?
Are you making enough compared to other Americans? Use this calculator to find out: Income Percentile Calculator for American Income
Why is America becoming so unequal and what to do about it? Check out How to Make Money Despite Wealth Inequality