Printer Friendly

The dot bomb. (Dot-com Bubble).

Back in 1841, Charles Mackay wrote a wonderful book. The title is Extraordinary Popular Delusions and the Madness of Crowds. The book is still in print (ISBN: 1586635581) and its first three chapters should be required reading for anybody planning to put money into the stock market. The beginning of the book covers the investment fads such as, the Tulip Mania (1635), John Law's Mississippi Scheme (1720), and the South Sea Bubble (1721).

If Mr. Mackay had been alive in the 1990s he would have been a sought-after talkshow guest. He would have told the crowds who were putting their money into e.commerce stocks they were crazy. Of course, few would have taken his advice. That's the way it is with stock market bubbles; hype trumps common sense every time.

The Dot-com Bubble, as it was called, started to lift off in the mid-1990s. The Internet was new and tens of thousands of people had novel ideas about how to exploit it for profit. Some of them might even have worked--eventually.

The experts said this WWW thing was going to be huge. In just a handful of years, everything was going to be done on the Internet. No more radios, newspapers, televisions, VCRs, banks, stores, movie theatres, business meetings--it was all going to happen on the Internet.

Do you want some stamps? Buy them from e.postage.

Is your pet goldfish a bit off colour? Pay for an online consultation at e.petvet.

It was the best of times for computer geeks. New e.business companies were springing up by the dozen daily.

Onvia.com is a typical example of what happened. Glenn Ballman started the company in Vancouver in 1997. The idea was to create an online marketplace for small business; it was a place where small companies could go to find suppliers and customers. Onvia.com was where a nursery owner could locate a low-cost supplier of seed trays, or a self-employed accountant could find customers who needed financial advice.

In 1998, Mr. Ballman moved the business to Seattle for better access to investors and customers. The company raised $71.5 million in venture capital and Onvia.com went public in March 2000. It was listed on the Nasdaq Stock Exchange and opened at $21 U.S. a share. By the close of business on that first day Onvia.com shares were changing hands for $61.50 U.S. In just one day, Glenn Ballman had become a billionaire, at least on paper.

Onvia.com launched itself onto the public in the middle of a frenzy of buying. Just the day before its Initial Public Offering, Jim Cramer gave the keynote speech at the 6th Annual Internet and Electronic Commerce Conference and Exposition. Mr. Cramer was a money manager and the founder of TheStreet.com. He was one of the go-to guys for information on the e.business boom.

This is what he told his eager listeners: "You want winners? You want me to [discuss what I'm] buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now. OK. Here goes. Write them down--no handouts here!: 724 Solutions ... Ariba ... Digital Island ... Exodus ... InfoSpace. com ... Inktomi ... Mercury Interactive ... Sonera ... VeriSign ... and, Veritas Software."

All these companies traded on the Nasdaq Exchange, which 10 days later hit its highest ever level of 5,132. Then, in the middle of March 2000, the dot-com bubble burst. A year and a half later, the Nasdaq hit bottom at 1,387, and it still hovers just a little above that level.

Seventy-three percent of the value of the NASDAQ had disappeared in less than 18 months. Hundreds of dot-corn companies such as, Excite@Home, Exodus, and 360 Networks had disappeared into bankruptcy. Half the hot stocks that Jim Cramer listed in his speech are no longer traded on the Nasdaq.

Thousands of investors were wiped out. Was anything learned by the experience?

Interviewed by Salon.com in June 2002, Jim Cramer answered that question emphatically: "No. We won't have learned jack, because it's the nature of manias. It just happened."

At the end of April 2003, Onvia.com was still in business--just; its shares were changing hands for $2.67 U.S. each.

DOT-CON

A lot of people put into the dot-com bubble because they were advised to do so by market analysts. These are people who research companies for brokers and other financial institutions. They are very well paid and are, at least in theory, experts brimming over with honesty and integrity. Investors turn to these analysts for unbiased advice on what are good investments and what are the ones to steer clear of.

During the dot-com boom, several of these analysts almost took on the status of movie stars. People such as Henry Blodget, Mary Meeker, and Jack Grubman were the darlings of Wall Street. What they said could move markets. Hungry investors clung on their every word.

When the bubble burst, those who lost their life savings looked for someone to blame. They found the Wall Street analysts in their sites. So did the Securities and Exchange Commission (SEC), the body that polices stock markets in the United States.

In April 2003, Mr. Grubman and Mr. Blodget were both banned from trading for the rest of their lives and ordered to pay millions of dollars in fines. Ten of the biggest names on Wall Street--Merrill Lynch, Citigroup, Salomon Smith Barney, Credit Suisse First Boston, J.P. Morgan, Goldman Sachs, and others--shared penalties of $1.4 billion.

The SEC charged that many financial institutions and their analysts were recommending stocks in which they had no confidence. They did this because either they owned shares in these companies and wanted to get rid of them, or because they were handling investment banking for the companies. The fees associated with advising companies on takeovers and stock sales earned the investment bankers billions.

Internal e-mails came to light in which analysts were describing certain stocks as "pieces of junk." But, the banking side of their firms were handling IPOs for these companies. So, in public, analysts were touting the stocks they considered to be almost worthless as must-buys.
COPYRIGHT 2003 Canada & the World
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2003, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Canada and the World Backgrounder
Geographic Code:1CANA
Date:May 1, 2003
Words:1061
Previous Article:As old as the markets. (Bubbles).
Next Article:There's one born every minute. (Swindles).
Topics:


Related Articles
Do you ...?
The Net Nabbed TV's Best: Where Are They Now?
America sneezed: From San Francisco to Mexico City--a personal view of the dot-com recession. (Tech Talk).
About this issue.
ROCKY ROAD TO THE WEST SOCAL ECONOMY WEATHERING STORM ON WALL STREET.
Bubble boy. (Political Booknotes).
Technology forecast 2002-2004, volume 1. (IT News).
Ice cream Dreamin'. (BFF Giveaway).
Whitestone reports decrease in number, increase in value for 2003 deals.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters