The Dot-Com Bubble

Here read this, I wrote it,

"The first was a shallow recession which ran from about March 2001 to November. Although it was commonly called the “Dot Com Bubble,” it was set off by the discovery of widespread fraud and corporate trickery beginning in the summer of 2000.

Emblematic of the dozens of scandals was Enron. "

Insightful commentary or simply brilliant? Seriously, why do we call it the “Dot-Com Bubble?” Am I right in saying that the cause was corporate hijinks?

Because, like bubbles, the dot-coms were ephemeral structures which investment dollars inflated and inflated in worth until they popped.

We could call it the dot-com balloon if you prefer, although balloons tend to be more stable than bubbles.

The dot com bubble was the runup of internet stocks from about 1996-2001.
It was characterized by ridiculous valuations for small, money losing tech companies. The thinking was that the winner was the company with the largest number of customers in the shortest amount of time, even if it meant losing tons of money or even if there was no clear idea how the company would ever turn a profit.

Some of the companies were legit (Sun, Cisco, EBay, etc), but a lot were ridiculous. The accounting scandals were at the tail end, but the bubble was already bursting by that time anyway.

In the end, it wasn’t so much trickery, as it was a completely unrealistic expectation for these new companies. Investors seemed to forget basic business valuation principles, and threw insane amounts of money at half-assed business plans that had no chance of working.

The dot-com bubble was a different problem, a little earlier than that. Essentially, venture capitalists, high on the success of Netscape and Amazon, poured money into tons of non-money-making business in the hopes that their business models, would eventually bear fruit. This drove prices of dot-com stocks to ridiculous prices during the mid-to-late 1990’s and brought on the boom in “day-trading.” By 1999 or so, the investors started getting a little impatient for profit, and after a little investigation, started realizing that most of thses companies would never get anywhere. The stock prices plummetted, the funding dried up, and tens of thousands of techies (myself included) lost jobs.

It had nothing to do with the Enron/Tyco/Worldcom bunch.

Is this the case? If so I will have to rewrite, and rethink. I hate it when that happens.

Dot Com was different than the scandals?

Were the dot-com bubble and the recession actually related? Was it indeed the corporate fraud that caused the recesson and the dot-com bubble merely a coincidence? These are subject you might investigate.

And, of course, there was 9/11.

That was almost a year later. Odd how our memory has a pre- and a post-9/11 section.

I’d have to agree with jk1245 and cmkeller. I graduated from university slightly too late to take advantage of the heady tech market, where anything beginning with “e-” and offering shares was a money magnet.

The internet was still a buzzword, companies like eBay, Amazon, etc. had started from nothing and soared to huge heights, and investors were scrambling to get in on the ground floor of similar stuff. Anything using the internet could have been “the next big thing”, so you just had to do something on it and the dollars started coming in. You obviously had to use money to make money, (coding, advertising, marketing, etc), so the fact that the books for startups were way in the red didn’t matter. The stupidest company I remember was one were you could do grocery shopping online, and they would Fedex the stuff to you for free. People would order a bag of chips and get it mailed to them. (Things like this is where the 1.Something 2.??? 3.Profit! meme came from).

I can’t quite say why it all started downhill, except that sanity finally prevailed. (Though a friend of mine did start working at the end for a company that had long hours and no pay (issuing shares to the employees in lieu), so it didn’t happen overnight).

The Wikipedia article isn’t bad reading, actually.

The dot com bubble was really more of a 1996-1999 phenomenon, like others have said. I worked on a few business plans for startups during that period, and to call them overly optimistic is like calling a crazed psychopath moody.

I had a number of friends who gave up good brick-and-mortar jobs to take a flyer in online startups, working for sweatshop wages and stock options. By the time they could exercise the options, the companies had already burned through their start-up capital and were either bankrupt or on the edge of it.

The real relation to corporate fraud and trickery came from the “anything is possible” mentality of that era, and the willingness to blue-sky projections to justify shaky decisions.

Different animals. What’s referred to as the dot com bubble was a run-up of internet and tech stocks. As others have pointed out, companies with hugely flawed business plans were attracting large amount of speculative capital. You can’t ship 10lb. bags of dog food to households at a price lower than the local pet store and still make money. There were companies in New York that had delivery guys running around delivering packs of gum ordered over the internet in the middle of the night.

Because these stocks were showing so much appreciation, mutual funds that invested in tech stocks were attracting a lot of money and they were throwing it into everything. As always, when profits don’t follow, the bubble bursts.

Enron and Worldcom, etc. were just out and out accounting fraud. You might be able to say that had the dot com bubble not burst the companies that were cooking the books may have found their way out of their messes instead of going bankrupt. That’s speculation.

SpartyDog:! I worked for them!

It was? By whom? Bubbles are associated with expansions, not recessions. If anything the bursting of a bubble may lead to a recession.

Conclusive attribution of recessions to specific causes is best avoided. Economists often argue about the causes for decades to come.

The Fed report (pdf) on the 2001 recession lists the stock market decline in 2000 as one of many causes, and not necessarily the most important. Above all there was 9/11; without it, the flattening in mid-2001 might have been so minor that it wouldn’t have satisfied the technical requirements for a recession.

Y2K hysteria may also have played a minor role in the 2001 recession. Companies that had just poured 10’s of millions into updating their computer infrastructures were mighty unwilling to spend further dollars on tech improvements or software for the next few years.

In your OP you wrote:

That’s 2001. 9/11 happenned in 2001. Did you mean to write 2000 instead of 2001?

May as well add my $0.02. I worked for a big dot com in the late 90’s (one of the few that is still alive and healthy). The stock ran up from $6.50 in late 1998 to $237 in early 2000 (bubble) and then back down to under $6 in mid-2002 (burst).

The cause was overheated expectations by the market as to future earnings. Even the stock of K-Tel records shot up when they announced they would sell their cheesy records over the web, going from $3 to $34 in less than two months.

The stock of many tech companies was trading at a share price of about 100 times earnings-per-share or more, about 10 times higher than a more reasonable benchmark. The expectations for growth and future earnings were just completely unjustified.

On the other hand, the problems that sunk Enron were simply fraud.

Now, there is some intersection here. Many tech companies came under pressure to keep those numbers up and were doing either unwise or fraudulent things to do so. One company I worked for (telecom billing) would record revenue on business upon contract signing, even though the work was spread out over the following two years. (A more conservative and conventional approach would be to accrue revenue monthly as services were performed.) Then, some of the contracts were canceled due to poor performance and there was no cash stream, and the house of cards came down. Microstrategy fell into this sort of trap.

Another company (domain registrar) was building up partnerships with web hosting companies to sell large numbers of domains dirt cheap to build up their customer numbers for Wall Street (shame on Wall Street for looking at that instead of fundamentals). We made virtually no money on this but got hundreds of thousands of “customers.”

In more famous cases, like AOL, the companies were effectively bartering services, like selling services and equipment to a company with an agreement that they would buy an equal amount of stuff from the other company. They would book the sale as revenue, although that violates GAAP (generally accepted accounting principles) since the sale was linked to another transaction. AOL paid $300 million in fines.

The fraud was not a direct result of the bubble but certain cases of it were born out of the desperation created by the bursting of the bubble.

Wasn’t the subject of a documentary on the dot com craze? If it was, did you make the editor’s cut?

It was, but I’ve never seen it and I highly doubt I was in it. I just programmed for them. I doubt they shot any footage of us code jockeys typing away. They probably got the executives and maybe a few action shots of the bike messengers and warehouses.

Depends on who your value investing guru is – some would allow that 20:1 P/E was not overpriced (but 21 probably was). Of course this was not even an issue with many or most dot-coms because so few of them ever got to the point of actually generating net positive earnings, so their P/E was literally ∞.

Someone once said that it is the nature of all non-permanent trends to reverse themselves eventually. Double-digit, triple-digit percentage run-ups in stock are almost certainly a non-permanent trend in any industry.

People also characterized a fairly real paradigm shift in a fairly unreal way. “Commerce is moving online, so if we move online, we’ll all be rich!” No, commerce was moving online, but all that really meant was that – as in the bricks and mortar world – only the best, smartest-planned companies would make money in that environment. The more that the notion of ubiquitous online commerce and media became a reality, the less likely it was you could get someone to buy your stock by saying “But I’m a dot-com.” BFD, everyone’s a dot-com to some extent, and your particular business model happens to blow.

N.B. that those who corrected the OP’s conflation of “dot-com bust” and “Worldcom/Enron” were right – mostly. The two phenomena were largely different. However, one of the (many) bogus things Bernie Ebbers of WorldCom did to tout the company was make overinflated estimates of fiber optic usage and how much this would profit the company. And Enron did traffic in both broadband services and nebulous “virtual commodity exchange” businesses. I can’t remember exactly, but I’m pretty sure I remember (pre-scandal) some Enron honcho actually saying in an interview that they were moving toward becoming a dot-com-type company (why not say that? Everyone was back then).

Thank you all. Your stories have given me places to start in order to get a handle on this.

Keep 'em coming!

Warning: Youtube video,, catchy tune.