It’s a statistic to sober up the most bullish investor. On 10 March 2000, the US Nasdaq index hit 5,132. Dotcom mania was in full swing, and the key American technology index looked like it would never stop rising.
But that day, it did. After hitting that peak, the Nasdaq went into a steep decline that made even the drop in the Japanese Nikkei index in the 1990s look benign by comparison. By 2002, it had plunged all the way back to 1,300, wiping out three-quarters of its value in around 18 months. The dotcom bubble, of which the Nasdaq was always the best measure, had well and truly burst.
A decade on, what can investors learn? Two lessons are important. Bubbles, for all the hype associated with them, usually contain an important grain of truth. And just because something is overhyped, it doesn’t mean you can afford to ignore it – a lesson that clearly applies to China and the rest of the Bric economies now.
Future economic historians will no doubt cast the dotcom bubble, along with Dutch tulips, as one of the best examples of a capitalist system going completely haywire. And with good reason. For a time, it seemed like any vaguely plausible young man or woman with a convincing line in patter about ‘eyeballs’, ‘land grabs’ and ‘first-mover advantages’ could load up with a few million in venture capital and bank a fortune from the initial public offering a few months later. Mundane matters like having any revenues, or indeed any knowledge of how to build a website, could be conveniently forgotten. In the ‘new economy’, everything seemed possible.
So it’s no surprise that many dreams turned to dust. Investors lost a huge amount of money. And yet, looking back, the main surprise is just how much truth there was to many of the claims made at the height of the bubble. The internet genuinely was a disruptive technology. Big industries have been consigned to history. Others have been changed completely. Look at the state of the newspaper industry. Observe the plight of once-mighty record labels, such as EMI. Music stores, bookshops and travel agents are vanishing from local high streets. And the process hasn’t stopped. Internet-enabled mobiles are only just starting to reach the mass market. Plenty more industries will be changed forever before the web’s impact has played out.
And it really was a ‘land grab’. Want to launch an online book store against Amazon, or a search engine against Google? Forget it. Those companies dominate their space, brushing aside all rivals. They will be the great monopolists of the 21st century – precisely because they got in early and, where necessary, spent big money to establish themselves. All the ‘new economy’ evangelists got wrong was the timing. It all took a bit longer than they predicted. Yet even on that they were only out by a few years. The dotcom boom was more like the railway boom of the 1880s than the tulip craze. Railways had a huge economic impact. Just like that bubble, the dotcom boom took something of real importance and magnified it to daft proportions.
So what’s the equivalent today? There seem to be plenty of bubbles in the world right now. British house prices, for example. Or government bonds. Or equities in China, or any of the other emerging markets giants, such as Brazil, Russia and India. Some are just bonkers. Why are British house prices as high or higher than they were before the credit crunch hit, when they should be much lower? And how can it make sense to lend money for ten years to a practically bankrupt Spanish or Italian – or indeed British – government at rates of around 4%? Those are just bubbles. You don’t want to go anywhere near them.
But the Brics? They’re different. Sure, it’s hard to value stocks accurately in China. We’re not sure we really believe the growth figures Beijing publishes, never mind the price/earnings ratios that appear on the Shanghai bourse. We have no real idea whether Brazil can grow in the next decade as rapidly as it did in the last, whether Russia is at long last a stable democracy, or whether India can complete its journey to modernity. We may well look back on the mania for the Bric stockmarkets in 2020 and wonder what on earth we were thinking.
But it’s unlikely that we’ll think nothing of significance was going on. The Bric economies have passed the point of no return. They are too far along the path of industrialisation to go back to being agricultural, resource-based economies. With a combined population of 2.8 billion, that is going to have a huge effect on the global economy. Whole industries, trade patterns, and cycles of capital will be changed permanently.
It’s very similar to the dotcom bubble. Over-hyped and over-sold, but still of huge significance. The lesson is simple. Don’t get fooled by the bubble – when prices get crazy, hold your nerve and refuse to invest, even when they’re racing upwards. But don’t let that blind you to the long-term impact on the rest of the world and your portfolio. If you’d bought tech stocks in 2002 you’d have done pretty well. And if you buy Bric markets after the inevitable correction, you’ll be buying into one of the great trends of the century – and that’s not something any investor wants to miss.