After 15 years, the Nasdaq Composite Index recently eclipsed its March 2000 record high. But The Wall Street Journal’s Jason Zweig says that before they get too excited, investors would be wise to remember the lessons of the Nasdaq’s decade-and-a-half of struggle to regain its high.
“Investors weren’t wrong; they just paid too much to be right,” Zweig says in discussing how investors had bid shares of Internet and tech stocks up to ridiculous levels 15 years ago. “Back in late 1999 and early 2000, investors were so infatuated with how technology would transform the world that they were willing to pay any price and bear any burden to buy stocks connected with the Internet and telecommunications.”
They were right in betting many of those firms would change the world, Zweig says. But they were wrong to pay prices that were dozens or hundreds of times normal valuations for them. “That’s what happens whenever investors overpay for excitement,” Zweig writes. “It’s why people who invested in Japan in late 1989, when stocks there were trading at 54 times earnings, still haven’t broken even. It’s why investors who bought U.S. stocks at the peak of the 1929 bull market lost more than 80% of their money in less than three years.”
Just as euphoric investors binged on technology, media and telecom stocks without regard for valuation in the late 90s and early 2000, many are doing the same today with social-media and other stocks connected to the “sharing economy,” Zweig says. “The sharing economy of early 2015 is no different than the ‘new economy’ of early 2000: It will almost certainly turn out to be a huge boon for businesses and consumers. But it will wipe out investors who think no price is too high to participate.”