Thursday, January 13, 2005 - Dot-com bubble's legacy: unrealistic expectations

The Houston Chronicle has an interesting look back at the Tech bubble. And lest you think it is all just for historic perspective, remember that many of the students now in finance classes were still in high school and had no interest whatsoever in stocks. - Dot-com bubble's legacy: unrealistic expectations

Some of the highlights:

"The Nasdaq is still 58.6 percent off its 2000 high as of Wednesday's close, and the technology and biotechnology corporations that helped create the bubble have either matured into value-oriented companies with realistic profit expectations, or have gone under. By the time the Nasdaq is poised for a new run higher, the entire character of the Nasdaq may have changed."

"The impressive gains in 2003 -- a 25.3 percent rise in the Dow and a 50 percent rise in the Nasdaq-- showed that the market could recover. Still, for many investors, stellar returns may have created an unrealistic picture of a stock market that historically has gained 8 percent to 10 percent a year."

"The final tally: the Dow had fallen 37.8 percent from its high, the S&P 500 lost 49.5 percent, and the tech-heavy and startup-friendly Nasdaq tumbled 77.9 percent."

"Billions of dollars simply ... evaporated."

Read the rest of the article at the Houston Chronicle site.

Just as an aside, while the Houston Chronicle's archive is short (only 7 days free), I consistently find it being my first or second read of the day: well written, easy to navigate, and interesting topics. Keep up the good work HC!

1 comment:

Anonymous said...

The quote that gets me is this one:

'"Around 1999 and 2000, anybody who wasn't in the market at that point decided, 'Wow, look what I've been missing out on,' and piled in," said Chris Johnson, director of quantitative analysis at Schaeffer's Investment Research in Cincinnati.'

Given what we know about momentum investing, under & overreation, etc., I always wonder what the magic point in time is where an investor looks around and says, "ok, time for me to jump in too!" How long does it have to be going up before they decide it's an actual trend rather than a temporary blip? There's been a flurry of activity in the behavioral lit trying to determine when individuals believe in hot hand vs. regression to the mean for prediction, which gets at a little of it. But I tend to think of it more in terms of a quasi-Bayesian updating process: I keep taking in new observations, and finally an observation pushes me over some threshold that makes me shift from believing the trend is temporary vs. permanent. There are several theoretical papers that play with this, but do you know of any empirical evidence?