The Dot-Com Crash

The internet in the late 1990s was a genuinely transformative technology, and the investors who believed that were correct. The dot-com crash of 2000 to 2002 happened because a huge number of internet stocks were priced as if that correct belief also meant any price paid today for any company touching the internet was justified. It didn't.

The Nasdaq Composite fell about 78 percent from its March 2000 peak to its October 2002 low, and the technology kept right on changing the world while most of the money invested at those prices was gone. Many dot-com companies had no earnings to put a multiple on at all, some had barely any revenue, and a real number of them had a clear, calculable date on which they'd run out of cash, because the business model itself required continuous outside funding just to keep operating, not because of some temporary rough patch.

right about the trend, wrong about the price

Believing the internet would change commerce, media, and communication was a correct read of a real trend, and it turned out to be true almost exactly as forecast. But "this trend is real" and "therefore this specific stock, at this specific price, with this business model, is a good investment" are two different claims, and they require two different kinds of evidence. The trend being real doesn't tell you whether the company in front of you can survive to benefit from it, or whether the price already assumes more success than the entire trend could deliver to that one company. That gap, between a real trend and a specific price, is the mistake every mania in this series comes back to.

cash runway as the number that mattered

For companies with no profit, the relevant number wasn't a P/E ratio, since there were no earnings to divide into the price. It was cash on hand divided by the rate the company was burning through it, a runway measured in months. When outside financing dried up as sentiment turned in 2000, companies with a short runway and no path to profitability simply ran out of money, regardless of how promising their technology or their traffic numbers looked.

• The technology thesis was correct: the internet did reshape commerce and media roughly as believed.
• The valuation thesis was, for most individual stocks, disconnected from any earnings or even any credible near-term path to earnings.
• Cash runway, not the P/E multiple used in the Nifty Fifty era, was the number that determined which companies survived the unwind.

Buffett wrote that the same year the Nasdaq peaked. When a trend is obviously real and obviously reshaping the world, it's tempting to treat that as proof the buying is safe. The trend being real is what made the speculation feel easy. It never made the prices right.