The NASDAQ Surpasses Its Dot-Com Bubble High

On March 10, 2000, the NASDAQ set an intraday record of 5,132.52.  The index would later close that day at a record 5,048.62.

 

Later that year, the NASDAQ would find itself closing below 2,500 points.  On October 9, 2002, during the darkest depths of the Dot-Com Bust, the NASDAQ closed at a low of 1,114.11.

 

On April 23, 2015, the NASDAQ closed at 5,056.06, beating its previous record of 5,048.62 set on March 10, 2000.  On Thursday, June 18, the NASDAQ set a new intraday record of 5,143.32.  It made headlines, which surmised that a major psychological barrier had been broken through now that the NASDAQ is “finally” showing a positive return from the Dot-Com Bubble highs over 15 years ago.

 

NASDAQ OMX Group, NASDAQ Composite Index© [NASDAQCOM], retrieved from FRED, Federal Reserve Bank of St. Louis <https://research.stlouisfed.org/fred2/series/NASDAQCOM/, June 22, 2015.>

Lessons Learned From the Dot-Com Bubble

 

Perhaps the greatest lesson learned from the Dot-Com Bubble is that it is crucial to know how to place a valuation on your investment.  Investing in the greatest companies on Earth will not save you if you vastly overpay for them.  And it certainly did not help that during the Dot-Com Bubble, start-up web and technology companies were being offered billion dollar IPO’s without any earnings history.  Even grand, established companies like Microsoft were trading at over 85 times earnings.  Today, their stock still trades below their Dot-Com Bubble market price high.  On March 10th, 2000, Microsoft closed at $50.50.  Today, Microsoft closed at $46.23/share.  This is an illusion of decline.  Microsoft’s earnings per share during FY2000 were 0.91.  Their current EPS stands at 2.41, nearly 2.65 times higher than during the Dot-Com Bubble.  Microsoft is raking in substantially more cash today, yet their stock’s market price is less than during the NASDAQ’s 2000 apex.

 

This goes to show the observer how patently insane Microsoft’s valuation was during the Dot-Com Bubble.  During those crazy days, any teenager working at a fast food restaurant could double their money investing in the next hot tech IPO.  Responsible, conservative value investors were ridiculed and considered dinosaurs on the verge of going extinct.  Once reasonable individuals found themselves caught up in the madness.  Yet, in the end, valuations won out as they always do, and the massive overvaluations of these nothing-companies caused one of the greatest market over-corrections the world had ever seen.  If an investor were to buy into a stock based on hype without attempting to determine its intrinsic value, as clearly illustrated by this example, it could have ended up in a disaster that could’ve taken decades to recover from – if ever.

 

Another lesson learned is that often the worst investment one can make is in the form of a single, large lump sum deposit.  Such actions attempt to time the market, and if one thing Mr. Market has taught us, it’s that it’s almost impossible to do so.  A person that would have invested a single lump sum of $16,000.00 into the NASDAQ upon close on March 10, 2000, would have found themselves not breaking even until April 23, 2015, 5,522 calendar days later.  But what if that same person were to have invested $1,000.00 upon close on March 10th (or closest closing day) of each year from FY2000 to FY2015?

 

NASDAQ DCA

 

That person would have seen a net gain of $10,832.00, or 67.70% return on investment.  This also does not include any dividend distributions that may have occurred along the way.

 

This example is not perfect – the chances of investing $16,000.00 at the worst case scenario FY2000 NASDAQ high is the same as putting said money in the 2002 NASDAQ low and making a huge profit, but this illustrates that attempting to do either is futile.  However, longterm gains are easily achievable by dollar cost averaging your investment over time, removing a lot of risk from the equation – even with a worst-case scenario initial investment.  This type of plan of attack can help hedge against an initial bad valuation, and may be especially useful when investing in index funds where a person needs to gauge the value of the market as a whole, which can be considerably more challenging than individual companies.

All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.

Anthony

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