Revisiting the Dot-Com bubble of the 2000

The dot-com bubble was a period of intense speculation in internet-based companies during the late 1990s, which led to a massive stock market crash starting in March 2000. 

The Few Years Before the Bubble Burst (c. 1995-2000) 

Rapid Internet Adoption: The widespread public adoption of the World Wide Web from the mid-1990s created immense excitement about the potential for new business models and services.

• Influx of Capital: Fueled by low interest rates and a "fear of missing out" (FOMO) among investors, venture capital poured into nearly any company with a ".com" in its name, regardless of a viable path to profitability.
• Speculative Investing: A belief emerged that traditional valuation metrics (like earnings and cash flow) were obsolete in the "new economy". Companies were often valued based on unconventional metrics like "eyeballs" (website traffic) and projected future growth.
• Soaring Valuations: The result was a stock market frenzy, with the tech-heavy NASDAQ Composite index rising from under 1,000 in 1995 to a peak of 5,048 on March 10, 2000. Many startups went public via Initial Public Offerings (IPOs) and saw their stock prices triple or quadruple on the first day of trading.
• High Spending: Many dot-com companies spent lavishly on advertising and marketing to build brand awareness quickly, burning through cash reserves without generating revenue.

When the Bubble Burst (March 2000 - c. 2001)

• Peak and Initial Decline: The bubble peaked on March 10, 2000, and began to deflate as investors started to question the sustainability and profitability of these new companies.
• Interest Rate Hikes: The U.S. Federal Reserve began raising interest rates to combat potential inflation, making it more expensive for companies to borrow money and dampening investment sentiment.
• Panic Selling: As high-profile companies began to miss earnings expectations or go bankrupt (e.g., Pets.com in November 2000), a wave of panic selling ensued.
• Market Collapse: The NASDAQ index fell by 9% in a single day on April 14, 2000, and the decline accelerated throughout 2001.

The Post-Bubble Burst Period (c. 2001-2002+)

• Massive Losses: By its trough in October 2002, the NASDAQ Composite had fallen nearly 77% from its peak, wiping out trillions of dollars in market capitalization. Even established tech companies like Cisco and Intel lost substantial portions of their value.
• Bankruptcies and Layoffs: A majority of the publicly traded dot-com companies folded after running out of capital, leading to mass layoffs in the tech sector.
• Shift in Investor Behavior: Investors became significantly more cautious, shifting funds to more established companies with proven, profitable business models and demanding greater financial discipline and transparency.
• Survival and Consolidation: Companies with sound business plans that survived the crash, such as Amazon and eBay, eventually emerged stronger and became dominant players in the internet economy.
• Regulatory Changes: The crash, combined with subsequent accounting scandals (like Enron and WorldCom), led to increased regulatory scrutiny and stricter reporting requirements to protect investors. 

During the dot-com bubble, Warren Buffett avoided internet stocks entirely, sticking to his value investing principles and accumulating large cash reserves. He warned that most of the new internet startups would fail. 

Buffett's Actions Before and During the Bubble

• Adherence to Value Investing: Buffett's core philosophy is to invest in businesses he can easily understand and which have durable competitive advantages, or "economic moats". He believed most tech companies lacked these characteristics due to their fast-changing nature and unproven business models, making their future performance difficult to project reliably.
• Public Warnings: In a 1999 Fortune article and in his letters to shareholders, Buffett explicitly warned against the "irrational exuberance" of the market, stating that expectations for future returns were unrealistic. He famously used the example that while the automobile industry revolutionized society, most car manufacturers eventually went bankrupt, predicting the same fate for the majority of internet startups.
• Underperformance and Criticism: As the tech-heavy NASDAQ index soared in 1999 (up nearly 86%), Berkshire Hathaway significantly underperformed the broader market, with its stock price falling nearly 50% from its June 1998 peak of $84,000 to a low of $41,000 in early 2000. For this, Buffett was widely criticized by analysts and the media as being "passe".
• Hoarding Cash: Rather than chasing the fad, Buffett built up significant cash reserves, which positioned him to buy assets at attractive prices when the market eventually corrected.
• Focus on 'Old Economy' Stocks: He continued to invest in proven, cash-generating businesses with stable operating margins, such as Coca-Cola and American Express.

The Outcome

• Vindication: When the bubble burst in March 2000, Buffett's strategy was vindicated. As the NASDAQ crashed by nearly 77% over the next two years, Berkshire Hathaway's stock rebounded, and its net profits rose 113% to $3.3 billion in 2000.
• Opportunistic Buying: He was able to make opportunistic purchases of corporate debt and private companies in the post-crash period when others were paralyzed by fear and lack of capital.