Ten years later, the dotcom bubble's lessons are still valid.
Ten years ago this week, the dotcom bubble began deflating. Having peaked at an intra-day level of 5,132 on 10 March 2000, the NASDAQ began a two and a half year slide that eventually bottomed-out at 1,172 in September 2002. In all, an eye-watering $5 trillion was wiped off the market value of technology companies.
And some of that money was mine. Back then, I was spending a lot of time in San Francisco, New York and Boston, jetting in and out to interview hi-tech luminaries such as Bill Gates, Michael Dell, Larry Ellison and Jeff Bezos, as well as a host of similar folk.
It was a ringside opportunity to peer inside some very interesting businesses, and ask some awkward questions. Which I did. And while I'm happy to report that I never invested in any of the bubble's wilder-eyed extremes, I did invest in companies such as PeopleSoft, Nokia and i2.
Wreckage
Some of the dotcom companies had no chance, viewed even through the rosiest of spectacles. Some of the business models were laughable; too many companies were competing for too small a market; there were shocking examples of corporate excess -- the list goes on.
But many were decent ideas, just ahead of their time. In a era of dial-up modems, for instance, Boo.com was simply far too graphics-intensive. So its founders' propensity to spend money simply accelerated the inevitable. But today? There are a host of successful fashion sites out there -- check out ASOS (LSE: ASC), for instance.
I didn't think Webvan would work, either, and it didn't -- despite heavyweight management muscle. But ten years on, Tesco (LSE: TSCO) is doing very nicely out of grocery shopping on the Internet.
And perfectly good companies got taken out simply because once the bubble had burst, demand slumped and investors and banks wouldn't provide funding for decent companies that just needed a bit more time.
My own stake in NASDAQ-quoted Belgian hi-tech digital printing systems manufacturer Xeikon, for instance, got wiped out that way. The company is still trading -- but the original investors lost every penny.
Will it happen again?
Of course -- at some point. Bubbles and busts are inevitable, it seems, and while it will be a long time before people forget how they got their fingers burned with technology and the Internet, no doubt many of the same investors splurged just as enthusiastically into property, emerging markets, gold and everything else.
But those of us who did lose money in the stock market crash of 2000 undoubtedly learned some useful lessons. It has certainly left a lasting impression on my own approach to investing.
So what are those lessons?
Business models matter
At the time, people were pumping money into anything that had the letter 'e' stuck in front of it. And more than a few dogs had an 'e' deliberately appended to their names for that very reason.
The Internet was all about 'eyeballs', we were told. Profits didn't matter. Oh yeah?
The harsh reality is that for companies to prosper, their revenues, profits, gross margins and costs all have to make sense. You can only sell at a loss for so long.
Valuations matter
In buying into PeopleSoft, I was buying into a business that I knew, and liked. Heck, I'd had three very lengthy interviews with the CEO, had conversed with most other members of the management team, and had attended just about every user conference. It was a good business, and Larry Ellison thought so too -- which is why he bought it.
But the simple fact was that the shares that I'd bought at $13 were a much better buy than subsequent purchases. PeopleSoft at $52 was simply too far out of kilter with the fundamentals, and I should have known better. Larry Ellison was never going to pay me $52 for those shares -- and he didn't.
Funding matters
When the American economy went into a tailspin in 2008, it was interesting to see Silicon Valley's most respected venture capitalists impose a Draconian spending freeze on the companies in which they were investing.
They had seen what had happened in the wake of the dotcom crash, and had learned the lesson: you need cash in the bank to pay the bills while the economy recovers.
Not every company that went to the wall in the wake of the dotcom crash was a dud. And not every survivor was best-of-breed. Simply put, to survive, you needed cash -- and if you didn't have it, you got taken out.
So more than ever -- and especially when looking at the accounts of smaller companies -- these days I like to see either net cash on the balance sheet, or at least some decent headroom in the borrowing facilities.
So there we have it. What lessons did you learn from the dotcom crash? Answers in the box below, please.
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