The benefits of a stock bubble

Bubbles in front of the New York Stock Exchange

(Image credit: Getty Images)

We should probably celebrate the moment by spending a few minutes “surfing” what used to be known as the “world wide web”, preferably using a Netscape browser via a dial-up connection that crashes every few minutes. The dotcom bubble is officially 25 years old.

It was one of the great stockmarket bubbles of all time. On 10 March 2000, the Nasdaq peaked at 5,048 after doubling in the space of a year, and rising fivefold over the course of five. It had been driven higher by a wave of enthusiasm for pioneering tech stocks. Over the following 12 months, it crashed spectacularly, losing 75% of its value.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Everyone was quitting their job to join a start-up. The companies that were lavishly funded prided themselves on their “burn rate” as they executed a “land grab” in pursuit of “eyeballs”.

Second, the bubble created a new model of entrepreneurship. To a whole generation, starting a new business was a natural career choice, and there were lots of new tools to help them get started. Even more significantly, the bubble created new forms of financing that allowed those new companies to grow very quickly. The result? We have a far more entrepreneurial culture than we had before the bubble burst.

The bravest investors had the last laugh

Finally, it made investors a lot of money. Many companies went bust and their shareholders were wiped out. But many of the other “crashes” seem quaint now. Amazon, then still a smallish online book shop, “collapsed” by almost 90%, but even if you had bought at the peak you would still have made a 50-fold return over the next 20 years.

If you had invested in Apple, then still an also-ran in the PC market, at the peak you would have made a 100-fold return. The same is true of many other stocks that appeared to be wiped out at the time. The Nasdaq overall has more than tripled since the 2000 peak.

Any investors who bought into the market even as it was going crazy would still have made plenty of money as long as they had the patience, and the nerves, to ride out the crash. If they were brave enough to buy as it was collapsing they would have made more.

The bursting of the bubble seemed like a catastrophe at the time. And plenty of people concluded the internet was just a fad. But a quarter of a century later it’s clear that it was a genuinely transformative technology, and probably more so than even the wildest predictions back in 2000.

It changed the way the economy works, affected every kind of business, introduced new products and services, and ways of delivering them, that had not been thought of before it was created.

With hindsight we can see that the dotcom crash was just the start of a wave of technological change – and we are still benefiting from the way it transformed both society and the global economy.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.