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Nasdaq Bubble

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THE NASDAQ BUBBLE OF 1999-2000

The Nasdaq index was first compiled in 1971; before then, there was no formal measure of growth stocks, although some economists used the Wiesenberger growth funds as a proxy index. Yet while there were some excesses in growth stocks, their rise and fall had not been much different from the S&P 500 index, as shown in the figure 17.12 until the 1999-2000 period, when the Nasdaq index rose so much that many growth stock valuations really did take on tulip bulb characteristics.

The foundation for the high-tech bubble was laid in late 1995, when Netscape went public, raising approximately $ 2 billion in its IPO and making Jim Clark the first internet billionaire. Not only was that figure dramatic, the offering broke new ground in the sense that Netscape had no earnings. In the past, P/E ratios for new companies may have been unrealistically high, but at least earnings existed. Netscape was selling only promises. Optimists pointed out at the time that Netscape had 85% of he browser market, apparently ignoring the fact that (a) they were giving the software away free and hoping to recoup by selling servers, and (b) Microsoft would not stand idly by and fail to compete. Netscape continued to bleed red ink and eventually was purchased by AOL.

By the time of the Netscape IPO, almost every investor was familiar with the Microsoft saga, which by then had already risen from a split-adjusted price of $ 0.20 at its IPO to $ 15 per share – a 300 bagger, on its way to becoming a 1,000-bagger. The view of many eager investors was that it did not pay to wait. If Netscape and other really were the “next big thing,” buy now and enjoy the ride. No reason to miss out on those instant riches.

Once other companies with no earnings, few assets, and fewer sales saw the light, investors were off to the races. Company after company was brought public

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