Tech Stocks Rollercoaster - How Was Your Ride?

Jack.Gavigan asks: "Today, the BBC is reporting that the NASDAQ index, widely regarded as a key indicator of the health of tech stocks, has dropped below 3,000 points. If you compare the NASDAQ's performance over the past five years with the Dow Jones' Industrial Average and the Standard & Poors' 500 Index, it becomes apparent that, whilst the NASDAQ began outperforming the other indices at the beginning of 1999, its meteoric rise into the financial stratosphere really took off toward the end of last year, peaking in March. Today, it's close to the level it was a year ago and, although it would have to drop another 1,000 points to bring it back in line with the DJInd.Avg. and the S&P500, I think that we may be able to conclude that the Internet/Tech Stocks bubble has finally deflated. How has the rise and fall of Internet and tech stocks affected your lives and careers? If so, was it for better or for worse?"

"Those graphs directly reflect my own experiences over the last 12 months. A year ago, I became CTO of a dot-com startup with seed funding and started a roller-coaster ride that peaked in February and March, when we were talking to VCs about how many millions they would invest. But April saw investor interest in dot-coms evaporate, and we shut down the company in July, returning the remaining seed funding to the original investors, rather than burn their money waiting for first-round investment from VCs who had recoiled from their former darlings - the dot-com entrepreneurs.

Despite failing to become a dot-com millionaire, I'm not hugely disappointed. Being part of the management team of a start-up is a truly unique experience and I would do it all over again for that reason alone. It sure beats being a wage slave. Fortunately, having been CTO of a dot-com has also had a positive effect on my career and, at the end of the roller-coaster ride, I can say that I have no regrets.

What sort of experiences did other Slashdot readers have over the past year? I know that there are probably one or two paper millionaires reading this right now, and I'm sure that their stories are very interesting, but what about the rest of you?"

Comments

A bittersweet experience

[update()]

Anyone else do this? I go to my Netscape page, check the weather and sports scores, look at my stocks and think, "Well, I lost money again. But at least Eric Raymond lost more!"

Yeah, I'm a bitter person ;-)

Economists expect this

[AnhZone]

Economists have a simple, but profound, explanation for this. (I am referring to those who actually study economic theory, not people on Wall Street who declare themselves economists and make predictions just as unreliable as anyone else.)

If it were easy to predict which companies would make a lot of money, well informed people with a lot of money would have invested in these companies, so their stock price already reflects what can be predicted. Even if the smart people don't have lots of money, they can start their own investment fund and rich uninformed people will give them money to invest, with the same effect.

If investors didn't behave this way, any smart investor could make huge amounts of money by betting on the companies that have good prospects. There would be lots of "$500 bills left on the sidewalk", and we don't see that - people pick them up when they find them.

The result is that stock prices usually reflect what can be figured out by smart people with industry knowledge. Stock prices can move wildly, but that is because there is a lot of true uncertainty about how a company's performance will turn out (nobody knows).

Unless you have inside information that no one else has (and it is not illegal to trade on it), on average you won't do any better than the market average return (adjusted for the riskiness of the stock - risky stocks have to have higher returns to get people to buy them.) Bubbles like the run up in the value of tech stocks make it appear that anyone who sees a future in IT is an investing genius, but the bursting of the bubble shows the fallacy of this.

Most investors, including fund managers, who make lots of money on the stock market are lucky, not endowed with an ability to see things that no one else does. Look at the best performing mutual funds in the months and years after their exceptional performance. They usually do worse than the market. So buying a fund that has already done well is usually a bad idea.

The upshot of this for you and me: pick a broad market index fund that will give you average market returns, but with lower variability than a narrow stock or fund, and much lower expenses (the only certain part of your rate of return) since the fund manager is not buying and selling all the time. Broad index funds outperform 70% of mutual funds, mainly due to low expenses. Look at your stocks and see if they have performed better than the S&P 500 over the past ten years, and how much more variable (risky) they have been.

You rarely hear this advice because no one makes money giving it, and financial types have to admit they don't accomplish much. Financial advisors get no commissions from these barebone funds, so they don't recommend them. Check out Vanguard index funds because Vanguard is in effect a cooperative owned by the investors - it has no financial incentive to sell you things you don't need that make high fees for the fund owners. Vanguard was created by large pension funds to introduce the first index funds.

IAAAE (I am an academic economist.)

AnhZone

Not unusual

[Icebox]

This type of performance isn't really all that unusual for young industries. Investors are always looking for the next big thing and many will ignore what they know about markets on the hunch they might be getting in on the ground level of the next Microsoft. The lure of the upside is enough to make them forget about the need for a good business plan, P/E ratios, earnings per share, or any of the other things that typically figure in to whether a company is valued correctly by the stock market.

Since stocks are tough to predict is might not be completely accurate to say that this is the end of the tech boom. Another could be around the corner. This is probably just the market shedding its excess baggage, competition is grew because there were more companies getting in so the weaker ones had to fall off. You could also say that the early predictions of the growth of the online market itself were overly ambitious, something that didn;t exactly help keep the enthusiasm high.

Luckily there are companies and people out there who aren't in this for the money. Good thingd will continue to happen on the internet, they just might not be profitable things.

Please, give me your crystal ball

[f5426]

> I think that we may be able to conclude that the Internet/Tech Stocks bubble has finally deflated

I think we are not able to conclude anything. The Internet/Tech Stock 'bubble' may still be present, and can put the world economy in a recession cycle, when the averge john doe will understand that the money he borrowed to day-trade have disapeared. Or it may rise again, when all the stupid (pets.com) or badly managed (boo.com) startups will all have failed and the few remaining will start trashing brick-and-mortar economy.

You cannot predict anything by looking at the stock market index. No matter how hard you try.

Cheers,

--fred

no problem

[fantomas]

no problem for me.

Being one third owner of a tiny internet company (5 employees total), business has been good for the last year and we've paid ourselves. We're thinking of investing in a new kettle and maybe another monitor and a keyboard this month. The strength of our company position in the boom economy means we are tentatively expanding to buying two types of coffee and maybe, just maybe, three types of chocolate biscuits. Might print some business cards to diversify our holdings. Been following NASDAQ closely. ;-)