Welcome back to the Deep Dive. I hope you are
sitting comfortably, and I hope you have your
time travel seatbelts fastened. Yay! Because
today, we're not just looking at a topic, we're
going back to a very specific, a very strange
vibe. It was a unique moment in human history,
it really was. I want you to close your eyes
for a second. Imagine a world where the coolest
piece of technology you own is beige. Oh, yeah.
It weighs about 50 pounds. It makes a screeching
static noise when you try to talk to the world.
That's the one. The song of the dial -up modem.
The handshake. Exactly. And I want you to imagine
a level of financial optimism that, when we look
back at it now with 20 -20 hindsight, looks less
like investing and more like a collective hallucination.
It was a mass delusion of a very expensive party
that everyone, and I mean everyone, thought would
never end. We are talking, of course, about the
dot -com bubble. Or the dot -com boom. Or if
you want to sound like you work on Wall Street,
the TMT bubble. TMT tech, media, and telecom.
Which I think is actually a better name for it,
right? Because dot -com makes it sound like it
was just about websites. Right, and that's a
crucial distinction to make right at the top.
When people remember this era, they think of
the sock puppet. Pets .com. They think of pets
.com. They think of websites selling dog food
or groceries or, you know, beanbag chairs. But
the bubble wasn't just the storefronts. No. It
was the entire infrastructure. It was the media
companies, the telecommunications giants laying
the cables, the hardware makers building the
routers. I mean, it was the whole ecosystem of
the future. It was the pipes, the content, and
the delivery trucks. Exactly. It was a synchronized
mania across three massive sectors. So to set
the scene for the listener, I want to transport
you to a very specific date. If you have a mental
calendar, put a big red pin in Friday, March
10, 2000. The peak. The absolute top of the mountain.
On that specific Friday, the NASDAQ Composite
Index hit 5 ,048 .62. Now, if you're not a finance
person, that number might just sound like...
a number. But the vibe on the street was pure
euphoria. Everyone felt rich. If you had money
in the market, you weren't just a saver, you
were a genius. You were picking winners. And
the thing is, it felt like you couldn't pick
a loser. Everything was going up. But to understand
just how high that mountain was, we have to look
at the climb. Because mountains don't just appear
overnight. No, they don't. Between 1995 and that
day in March 2000, the Nasdaq didn't just double,
it didn't just triple, it rose by 600%. 600 %
in five years. Just let that sink in for a second.
Imagine your house value going up 600 % in five
years. Unimaginable. Right. If you bought a house
for, say, $200 ,000, five years later it's worth
$1 .2 million, you'd feel pretty good about yourself.
You'd feel unstoppable. You'd probably buy a
boat. You'd buy two boats. And that's basically
what America did. It's staggering. It just defies
gravity. But, as the old saying goes, what goes
up? Must come down, and usually much faster than
it went up. Gravity is a harsh mistress in the
financial markets. By October 2002, so just two
and a half years later, the Nasdaq had fallen
78%. 78? It didn't just correct. It gave up all
its gains. Five years of wealth creation. Just...
evaporated. And that is usually where the story
stops for most people. The standard narrative
is people got greedy. They bought stupid stocks.
The stocks crashed. Everyone lost money. The
end. Right. It's a morality tale. It is. It's
treated like a fable about greed. Don't buy hype.
Don't quit your day job today. Trade all of that.
But our mission on this deep dive is to go a
lot deeper than that. We want to understand the
mechanics of the machine. We want to look at
the convergence of technology, psychology. And
this is the big one. People miss government policy.
The invisible hand of the government or maybe
not so invisible. Exactly. We need to see how
those three things combined to create this moment
of what one investor called temporary insanity.
And perhaps more importantly, we need to answer
the big provocative question. Was it all a waste?
That's the question that really stuck with me
reading through the research. We see the trillions
of dollars lost. But did we actually get anything
for it or was it just lighting money on fire
in a dumpster? It's a fascinating tradeoff because
if you look at the brokerage accounts of the
year 2002, it's a tragedy. It's ruined retirements.
Lives changed for the worse. Yeah. But if you
look at the cables in the ground, the servers
in the racks, the code that was written. you
might actually see the foundation of the modern
world. So let's unpack this. Let's start at the
beginning. Part one, the perfect storm. Yeah.
Because this didn't just happen out of nowhere.
No. You don't wake up one day and decide to value
a company that sells nothing at a billion dollars.
There were ingredients that had to come together
to bake this very expensive cake. Right. You
need a catalyst. You need a spark. And in this
case, the catalyst was a fundamental technological
shift. A huge one. We have to talk about Mosaic.
Yes. 1993. The Mosaic web browser. For the younger
listeners or even those who just forgot. Yeah.
Because tech moves so fast before Mosaic. What
was the Internet? What did it even look like?
it was ugly it was text it was a green screen
or a black screen with white text it was for
academics the military maybe some really hardcore
hobbyists who knew how to use command lines not
for the average person not at all it wasn't friendly
it was a tool for sharing research not a place
to hang out or shop it was a utility not a destination
perfect way to put it but then in 1993 you get
the release of the mosaic web browser and suddenly
the internet has images. Picture. It has buttons
you can click with a mouse. It has color. It
has a back button. It became visual. It gave
the internet a face. And that changed everything
because it made the web accessible to regular
human beings, not just computer scientists. It
was the moment the internet went from being like
radio to being like television. And the adoption
rates, they just reflect that shift completely.
I was looking at the data here and the jump is
wild. Between 1990 and 1997, the percentage of
households in the United States that owned a
computer That is a massive societal shift in
less than a decade. I mean, think about it. You
went from the computer being a luxury item. A
hobbyist thing. Yeah, something maybe a wealthy
person has in the den next to their telescope
to a household necessity, like a fridge or a
TV. Parents felt like... If they didn't get a
computer, their kids would be left behind in
school. And this brings up that concept of the
digital divide reducing. We're seeing the birth
of the information age right before our eyes.
And whenever you have a shift to a new economic
era, I mean, think about the shift from farming
to factories or the invention of the railroad
or electricity. You have a rush of capital. Right.
Investors smell a paradigm shift. They don't
want to miss the boat. They don't want to miss
the boat. They know the world is changing and
they know the people who own the infrastructure
of that change become the new robber barons.
But in the late 90s, it wasn't just fear of missing
out. It was policy fuel. Right. The government
wasn't just watching from the sidelines. They
were actively pouring gas on the fire. This is
the part of the research that surprised me the
most. I always thought of the bubble as just
crazy investors doing crazy things. But the government
set the table. Oh, they set the table, cooked
the meal, and served the drinks. In a few key
ways. First, you had the Taxpayer Relief Act
of 1997. Okay, taxpayer relief sounds boring.
It sounds like something you hear on C -SPAN
and fall asleep. Why was this huge? Because it
lowered the top marginal capital gains tax in
the U .S. Okay, break that down. ELI -5 that
for me. What does that actually mean for someone
sitting at home? Okay. So let's say you buy a
stock for $10 and sell it for $100. You made
a $90 profit. That's a capital gain. Yep. The
government wants a cut of that $90. Before 1997,
they took a bigger cut up to 28%. After 1997,
they cut it down to 20%. So if I make money betting
on stocks, I get to keep more of it. Simple as
that. Precisely. And what does that do to your
psychology as an investor? It incentivizes speculative
investment. If the penalty for cashing out is
lower and the reward is higher, you are more
willing to take a risk on a high growth, unproven
stock. You are willing to bet on the future.
So the government basically said the casinos
are open and the house is taking a smaller cut.
In a way, yes. and then you have to look at the
cost of the chips the cost of borrowing money
interest rates interest rates were declining
capital was cheap if you can borrow money for
next to nothing You aren't going to keep it under
the mattress. You aren't going to put it in a
savings account earning 2%. You're going to invest
it. You're going to chase yield. So we have low
taxes on winnings and cheap money to bet with.
A potent combination. And then the third leg
of the stool, we have the Telecommunications
Act of 1996. This is the one that really impacted
the infrastructure side, right? The pipe. Huge
impact. That act was the regulatory green light.
The expectation was that it would unleash a wave
of new technologies and competition. It basically
told the telecom companies, go out there and
build, compete, lay fiber, connect America. It
created a gold rush mentality to profit from
building the actual physical Internet. And everyone
wanted to own the pipes because the logic was,
I don't know which website will win, but they
all need the Internet. It's the classic selling
shovels in a gold rush strategy. Exactly. Except
everyone started selling shovels and suddenly
you had a billion shovels and, well, not enough
gold. Now, there is a name that comes up a lot
when we talk about this era. A man who was basically
the wizard behind the curtain. Alan Greenspan.
The chair of the Federal Reserve. The maestro,
as Bob Woodward called him. He is often quoted
as warning about irrational exuberance. I feel
like that phrase is on his tombstone. He said
it in a speech in 1996. He did. He asked how
do we know when irrational exuberance has unduly
escalated asset values? It was a warning shot.
But the market ignored him. And frankly, the
sources suggest his role was a bit more complicated
than just being the guy ringing the warning bell.
How so? Well, it's debated. But some argue he
actually fueled the investment frenzy later on.
There's this idea that by putting a positive
spin on stock valuations, or at least not aggressively
popping the bubble early on with rate hikes,
he gave the market a false sense of security.
The green stamp put. Right. In finance, a put
option protects you from a drop in price. The
Greenspan put was this psychological belief held
by traders that if things got too bad, the Fed
would step in and cut rates to save the market.
Like a safety net. Exactly. Dad will bail us
out. So if you believe the risk is limited because
the Fed has your back, but the upside is unlimited
because of the Internet, what do you do? You
bet the house. You bet the house. So you have
this perfect storm. A revolutionary technology,
a computer in every third home, low taxes on
profits, cheap money, and a regulatory environment
that says build, build, build. It's no wonder
people went a little crazy. It would have been
weird if they didn't go crazy. The incentives
were perfectly aligned for mania. Which brings
us to part two, the new economy mindset. This
is where the psychology really takes over. The
mania. Because looking back, the math, like,
just didn't take it. It doesn't work. I remember
looking at companies back then, even as a kid,
and hearing adults talk about these businesses.
They don't make any money, but they're worth
billions. Yeah. How did people rationalize that?
How do you look at a balance sheet full of red
ink and say, take my money? Because that was
the old economy thinking. You see, in the new
economy, profits were considered Well, almost
a liability. A liability. How can making money
be a bad thing? That sounds like the opposite
of business. It sounds insane, but follow the
logic, okay? If you were making a profit, it
meant you weren't reinvesting enough in growth.
It meant you were being conservative. And in
a lamb grab... You don't want to be conservative.
I want to capture territory. Exactly. If you
have a profit margin, it means you charge too
much and didn't acquire enough customers. The
metric wasn't price to earnings or P .E. That
was for, you know, Ford and Procter and Gamble.
That was for boring businesses. Right. Traditional
metrics were just thrown out the window. P .E.
is for losers. Just look at the P .E. ratio of
the Nasdaq at the peak. It reached 200. 200.
OK, break that down for me. What does that even
mean? It means that for every dollar of profit
these companies made, investors were paying $200
for the stock. Essentially, at that rate, assuming
earnings stayed flat, it would take you 200 years
to earn back your investment. That is optimistic.
It's beyond optimistic. It's theological. It
requires faith. Wow. To put that in perspective,
let's look at the Japanese asset bubble of 1991
that was famous for being massive. The grounds
of the Imperial Palace in Tokyo were rumored
to be worth more than all the real estate in
California. Right. Massive bubble. I remember
that. At the peak of that bubble, the P .E. only
reached 80. So the dot -com bubble was two and
a half times more expensive relative to earnings
than the Japanese bubble. That is the definition
of insanity. And it wasn't just the index. It
was specific stocks. I mean, look at Qualcomm.
Oh, Qualcomm, the chip maker. In 1999 alone,
a single year, Qualcomm shares rose 2 ,619%.
2 ,619%. So imagine putting $1 ,000 into Qualcomm
in January. Maybe your holiday bonus. And having
over $26 ,000 in December. You'd feel like a
genius. You'd quit your job. You'd tell everyone
at the bar how smart you are. And it wasn't just
one outlier. No. There were 12 other large cap
stocks that rose over 1 ,000 % that year. It
seemed easy. And the secret sauce seemed to be
the name. The magic suffix. The dot com. It was
like magic dust. Investors were eager to throw
money at anything with an internet prefix or
a dot com at the end. There were studies done
on this. You could take a boring mining company,
change the name to mining .com or e -mining,
and the stock would pop. Just for the name change.
No business change. Just for the name. No change
in business model. Just the signaling that we
get it. It was like canting racing stripes on
a turtle and calling it a race car. But there
was a logic to it, right? I mean, smart people
were doing this. Venture capitalists, hedge funds.
It wasn't just random gambling. There was a business
strategy driving this valuation. Yes. The strategy
was get big fast. Or sometimes get large or get
lost. It sounds like a threat. It basically was.
The theory was based on network effects. The
idea that the value of a network goes up as more
users join. Think about a fax machine. Right.
One fax machine is useless. Two are OK. A million
are indispensable. If you're the only one with
email, who are you emailing? Exactly. So the
goal was to grab as much mind share and market
share as possible immediately. You wanted to
be the standard. You wanted to be the verb. You
wanted people to say Google it, although Google
wasn't public yet. You wanted to be the Amazon
of whatever. Pet food. And how do you do that?
You spend massive amounts on advertising. You
sell your product for free or at a deep discount.
You accept huge net operating losses. So you
lose money on every sale. But you make it up
in volume. You make it up in future dominance.
That was the theory. The thinking was once we
own the market, once we are the only pet food
store online, then we can raise prices. Then
we can turn on the profit tap. Oh. But first,
we have to kill the competition with cash. We
have to scorch the earth so no one else can grow.
It's a war of attrition. I can bleed longer than
you can. It is. And that cash was being spent
on more than just customer acquisition. The lifestyle
of the dot -com era is legendary. Dot -com party.
It became a symbol of the excess. Companies that
had never made a dime would throw these lavish
launch parties. Open bars, celebrities, expensive
offices in the best parts of town. The beanbag
chairs. The foosball tables. And the Aeron chair.
We have to talk about the Aeron chair. I feel
like the Aeron chair is the unofficial mascot
of the bubble. It really is that Herman Miller
mesh chair. It cost over $1 ,000. And suddenly,
every startup with three employees and a domain
name had 20 of them. Why that chair? What was
the deal with that? It became the throne of the
dot com CEO. It was about projecting an aura
of invincibility. We are the new economy. We
play by different rules. We don't sit in stuffy
leather chairs like the old bankers. We sit in
a high tech mesh. We are the future. It was a
status symbol. A huge one. And the marketing
madness. I think it really reached its peak at
the Super Bowl. The Super Bowl is always a good
barometer of where the loose money is. Oh, yeah.
If you want to know who has too much cash. Look
at the commercials. Exactly. In January 2000,
for Super Bowl XXXIV, dot -com companies bought
between 12 and 19 of the 61 available ad spots.
That's almost a third of the Super Bowl. And
these spots cost, what, like $2 million for 30
seconds back then? Roughly. So you have companies,
again, with little to no revenue, burning millions
on a 30 -second spot. Right. You had E -Trade.
You had Monster .com. And you had Pets .com.
And just to show you how quickly the tide turned
by January 2001, the next Super Bowl. How many?
Only three dot com spot spots. Wow. From taking
over the broadcast to barely existing in one
year. And we can't talk about ads without mentioning
the sock puppet. Pets .com. The poster child
of the bubble. A very cute mascot. A very recognized
brand. People loved the puppet. He was everywhere.
He was on Good Morning America, wasn't he? He
was. But the business. The business. The business
model involved shipping heavy bags of dog food
across the country via FedEx. Which is expensive.
Dog food is heavy. It's incredibly expensive.
And they were selling the food for less than
it cost to buy and ship it. Wait, wait. Yes.
It was the ultimate example of get big fast,
without a plan to get profitable ever. Every
time someone bought a bag of dog food, Bets .com
lost money. So the more successful they were
at marketing, the faster they went broke. Precisely.
They were marketing their own suicide. And while
the companies were doing this, the regular people,
the retail investors, were eating it up. This
was the era of the day trader. It was unprecedented.
Before this, stock trading was for guys in suits
on Wall Street. Now, you had stories of people
quitting their steady jobs, doctors, lawyers,
factory workers, to sit at home and trade stocks
on their bulky PCs. Because it seemed easy. You
buy in the morning, it goes up 10 % by lunch,
you sell. Why work a 9 to 5? And the media played
a huge role in this. CNBC became the background
noise of America. They reported on the market
with the suspense of a sports event. It was play
-by -play action, pickers scrolling, flashing
red and green. It validated the mania. If it's
on TV, it must be real. Even the Wall Street
Journal, the bastion of financial conservatism,
ran an article suggesting that investors should
rethink the quaint idea of profits. When the
Wall Street Journal calls profits quaint, you
know you are in a bubble. That's the sign. It's
like a doctor calling a heartbeat optional. Absolutely.
Now, I want to pivot to something that often
gets overlooked in this story. We focus so much
on the websites, the pets .coms and the e -toys,
but there was a massive bubble happening underneath
them. Part three. The telecom bubble. The invisible
backbone. You can't have a website without the
pipes to deliver it. And the investment here
was even bigger than in the sock puppets. Oh,
much bigger in terms of hard assets. We talked
about that 1996 Telecom Act. In the five years
following that, telecommunications equipment
companies invested over $500 billion. $500 billion.
That's half a trillion. In five years. In fiber
optic cables, switches, wireless networks. They
were digging up streets in every major city.
They were laying cables across the Atlantic and
Pacific oceans. I remember seeing the spools
of orange conduit everywhere on the side of the
road. It felt like the whole world was under
construction. Yes, that was the physical manifestation
of the bubble. And most of this was financed
with heavy debt. They were borrowing billions
to dig holes. Why? What was the logic? They were
betting on a specific statistic. There was a
widely circulated myth, a report that came out
claiming that Internet traffic was doubling every
hundred days. Every hundred days. That's massive
exponential growth. That was the claim. If that
were true, within a few years, the entire population
of the Earth wouldn't be able to generate enough
data to fill the pipes. But it wasn't true. It
was true for a very short period in the mid -90s,
but then it slowed down significantly. But the
companies built their models as if it would double
every 100 days forever. So they were building
a 10 -lane highway for a dirt route's worth of
traffic. Exactly. They were building for 2010
demand in 1999. And just like the dot -coms,
governments saw dollar signs here, too. Specifically
with spectrum auctions. Right. This is where
companies bid for the rights to use radio frequencies
for mobile phones. The airwaves. Exactly. Specifically
for 3G, the third generation of mobile data.
In the UK, in April 2000, the government held
an auction for this spectrum. It raised 22 .5
billion pounds. That is a staggering amount of
money for thin air. Literally thin air. Radio
waves. And in Germany, in August 2000, it was
even higher, 30 billion pounds. These telecom
companies were spending billions just for the
permission to operate before they even built
a single tower. It was the winner's curse. To
win the option, you had to overpay. If you didn't
win, you were out of business because you had
no spectrum. If you did win, you were saddled
with so much debt, you might go out of business
anyway. Damned if you do, damned if you don't.
Precisely. But the U .S. had a bit of a hiccup
with this, didn't they? A massive failure, actually.
A 1999 auction had to be rerun because the winners
defaulted on $4 billion worth of bids. They bid
money they didn't have. You simply couldn't pay.
That should have been a warning sign, a huge
flashing red light. It should have been. But
the party was too loud. No one could hear the
warning. The problem was simple supply and demand.
The telecom companies built enough capacity for
a future that was 10 years away, not two years
away. supply vastly outstripped demand. And when
the crash came, who got hurt the most? The bond
investors. The people who lent the money for
all this infrastructure. Right. Not the stockholders,
the debt holders. Yeah. They ended up recovering
only about 20 % of their investments. Ouch. So
we have the tech mania, the telecom debt bomb,
and then we reach the summit, part four, the
peak and the smart money. March 10, 2000. NASDAQ
5 ,048 .62. Right. But there was a moment just
before that in January that really signaled the
peak for a lot of people. The AOL Time Warner
merger. The deal of the century. Announced January
10, 2000. It was the largest merger to date.
What was it? A $350 billion combined value? Something
like that. It was enormous. You had AOL America
Online, the new money internet service provider.
The company sending those CDs to your mailbox
every week. And they were buying Time Warner.
The old media giant. Movies, magazines, cable
news, Warner Brothers. An institution. It felt
upside down, the upstart buying the giant. At
the time, the true believers saw it as the ultimate
victory of the internet. The new economy was
literally swallowing the old economy. AOL was
using its inflated stock currency to buy real
assets. But skeptics saw it differently. The
smart money looked at that and said, this is
the top. Why? What was the signal? Because when
the bubble company buys the real company, it's
usually a sign that the bubble company knows
its stock is overvalued. They want to cash it
in for something tangible before the music stops.
It's like if I have a winning lottery ticket
that I know is fake, but I trade it for your
house before you figure it out. That is a perfect
analogy. AOL knew their stock price was fantasy.
They wanted to trade that fantasy paper for Time
Warner's real assets, copyrights, cables, studios.
And speaking of cashing in, let's talk about
the insiders. Because while retail investors
were buying, the people inside these companies,
the ones who saw the books, were itching to sell.
But they couldn't always sell immediately, right?
There were lockup periods. Right. What is a lockup
period? Usually after an IPO, an initial public
offering, employees and founders have to wait
often six months before they can sell their shares.
It's to prevent the stock from crashing on day
one from everyone selling. So they were paper
millionaires. They could look at the screen and
see they were worth $10 million, but they couldn't
buy a sandwich with it. Not yet. Correct. And
this created a predictable pattern that some
very smart investors exploited. Enter Sir John
Templeton. A legendary investor. He was in his
80s at this point. He looked at this market and
called it temporary insanity. He saw a once in
a lifetime opportunity. To make money on the
way down. Exactly. What was his strategy? He
shorted dot com stocks just before the lockup
periods expired. Shorting means betting the price
will go down. Yeah. He correctly predicted that
as soon as that six -month window opened, the
insiders, who knew the company wasn't making
any money, would rush to dump their stock to
buy houses and cars. He was betting on human
nature. He knew the employees would want to cash
out their lottery tickets. And that flood of
selling would crash the price. And he made a
fortune doing it. He made, what, $86 million
in a few months betting against the bubble? And
he wasn't the only one getting out. Mark Cuban.
the famous entrepreneur. He sold Broadcast .com
to Yahoo for billions in stock. But he didn't
just hold the Yahoo stock, did he? No, he knew
Yahoo was overvalued too. So he entered into
hedges, specifically callers. to protect his
gains. He essentially locked in his billion -dollar
status regardless of what the market did. If
Yahoo crashed, he was safe. Smart. And then you
have the telecom execs, the guys building the
pipes. Philip Anschutz sold $1 .9 billion worth
of stock. A billion. Joseph Nakio, $248 million.
Gary Winnick, $748 million. They were selling
hundreds of millions of dollars worth of stock
before the crash. Which tells you everything
you need to know about what they thought of their
own valuations. If they believe the hype, They
would have held on. They sold. So the smart money
is heading for the exits. The insiders are waiting
to dump. The timeline is ticking. And then the
triggers start to pull. Part five, the burst.
It wasn't one single thing. It was a cascade,
a death spiral. It started in March 2000. First,
there was Y2K. Remember Y2K, the millennium bug.
Everyone thought the computers were going to
crash at midnight on January 2000. Planes falling
out of the sky, toasters attacking people. Right.
So companies spent billions upgrading their systems
in 1998 and 1999 to prevent this. They bought
new servers, new software. And then nothing happened.
Nothing happened, which was great for society,
but bad for tech earnings. Once the clock struck
midnight, that spending stopped. It fell off
a cliff. Because they had already bought everything
they needed. Exactly. Suddenly. Tech companies
saw their orders dry up. They'd pulled all their
future revenue into 1999. Then, on March 13,
news broke that Japan had entered a recession.
That triggered a global sell -off. It made investors
nervous. The global economy wasn't as bulletproof
as they thought. Then, exactly one week later,
March 20, Barron's Magazine publishes a cover
story. Burning Up. That was the headline. The
article warned that Internet companies were running
out of cash fast. It analyzed the burn rate of
207 Internet companies. And what did they find?
They predicted that 51 of them would run out
of cash within 12 months. It was a splash of
cold water in the face of the market. It basically
said the emperor has no clothes and also no cash.
And on that same day. MicroStrategy. A huge high
-flyer software company. They announced a revenue
restatement. Which is a polite way of saying.
They admitted to aggressive accounting practices.
They had been booking revenue they hadn't actually
earned yet. Took it in the books. Essentially.
Their stock fell 62 % in a single day. Wow. From
$333 down to $140. 62 % in a day. That shatters
confidence. Because if MicroStrategy is lying,
who else is? Exactly. The trust evaporated. And
the hits kept coming. April 3, the Microsoft
case. Judge Thomas Penfield Jackson. He ruled
that Microsoft was guilty of monopolization and
violation of the Sherman Antitrust Act. This
is the Titan attack. If Microsoft can be broken
up by the government, no one is safe. Microsoft
shares dropped 15 % in a day. The Nasdaq dropped
8%. The whole sector got hit. And then the final
nail in the coffin. And this is the one that
really hurts to hear about. Tax day. This is
the tragic irony of the bubble. This is where
the retail investor really got crushed. Explain
this dynamic because it's just cruel. In 1999,
people made massive capital gains. They sold
stocks. They made millions on paper or in cash.
They felt rich. But by April 2000, the market
was sliding. Hard. But they still owe taxes on
the gains from 1999. The IRS works on a calendar
year. The IRS doesn't care that you lost money
in March 2000. They want their cut of what you
made in December 1999. Right. So imagine you
made $100 ,000 in 1999. You owe the government
maybe $20 ,000. But you reinvested that money
into the market in January because you thought
it would go up forever. By April, that $100 ,000
is now worth $10 ,000. But you still owe the
government $20 ,000. But you still owe the government
$20 ,000. Exactly. You are mathematically insolvent.
You are bankrupt. And to pay the tax bill, investors
were forced to sell their crashing stocks. Selling
begets selling. It creates a downward pressure.
Everyone is rushing for the exit at the same
time to pay Uncle Sam. Which caused the market
to crash even further. On that Friday, April
14th, the Nasdaq fell 9%. It ended a week where
it fell 25%. A quarter of the value gone in a
single week. And that was it. The death spiral
really set in. Capital dried up. No one wanted
to invest anymore. The metric shifted from how
many eyeballs do you have to what is your burn
rate? Burn rate. How fast are you dying? Exactly.
How many months until the cash runs out? And
for many, the answer was not many. Tets .com.
Gone. Nine months after its IPO, it was out of
business. Webvan. Boo .com. WorldCom, North Point
Communications, Global Crossing. Bankruptcies
everywhere. By November 2000, internet stocks
were down 75%. $1 .755 trillion in value was
wiped out. And the big guys weren't spared either.
Cisco. Cisco Systems, which was briefly the most
valuable company in the world, lost 80 % of its
stock value. 80%. Imagine owning the safest stock
in the sector, the guys making the routers, and
losing 80%. It was total devastation. Which brings
us to part six, aftermath and legacy. When the
smoke cleared, what was left? Well, there were
casualties, real human casualties. The job market
for programmers collapsed. There was a glut of
office equipment. We mentioned the errand chair
earlier. Right. After the crash, you could pick
up an $1 ,100 errand chair for pennies on the
dollar from liquidators. It became the symbol
of the failed startup. And university enrollment
in computer -related degrees dropped noticeably.
People thought. Tech is over. It was a fad. Can
you imagine thinking computers were a fad? But
that was a sentiment. The Internet thing didn't
work out. And then came the scandals. When the
tide goes out, you see who is swimming naked.
Oh, yeah. Enron in October 2001. WorldCom in
June 2002, which was the largest bankruptcy ever
at the time. Adelphia. Executives like Bernard
Ebers, Jeffrey Skilling, Kenneth Lay, they were
accused and convicted. It turned out a lot of
that new economy magic was just old -fashioned
fraud. But, and this is the crucial but, The
reason we are doing this deep dive. Not everyone
died. No. In fact, a surprising number survived.
48 % of dot -com companies actually survived
through 2004. They were battered. Their stock
prices were crushed. But they were still in business.
Amazon .Ebay. And a little company called Google,
which actually gained market share during this
time. The market shifted from fragmentation,
thousands of little startups, to consolidation.
a few giants emerged to dominate the landscape.
And this leads us to the bright side, the theory
by venture capitalist Fred Wilson. Fred Wilson
is a legend, and he lost 90 % of his net worth
in the crash, so he earned the right to have
an opinion on this. What does he say? He quotes
a friend who says, nothing important has ever
been built without irrational exuberance. That
is a powerful line. Nothing important has ever
been built without irrational exuberance. It
really is. The argument is that you need a mania.
You need investors to go a little crazy to open
up their pocketbooks wide enough to finance massive
infrastructure projects. Like the railroads.
Exactly. In the 1800s, we had a railroad bubble.
Investors lost everything, but the tracks remained.
Or the automobile industry. Or in this case,
the internet backbone. So all that money that
was lost... The $5 trillion, it didn't just disappear
into a black hole. No, it went into the ground.
It went into laying fiber optic cables. It went
into building server farms. It went into developing
software and databases. And when the companies
went bankrupt, that infrastructure didn't disappear.
The cables stayed in the ground. Exactly. The
investors lost their shirts, but society kept
the shirt. We got a high throughput backbone
for the Internet, essentially for free, paid
for by the speculative mania of the late 90s.
That is such a fascinating way to look at it.
The investors subsidized the modern world. They
did. The cheap bandwidth we enjoy today, the
ability to stream video, it's all running on
the surplus capacity built during the bubble.
They built the highway, went broke, and we are
driving on it for free. So as we wrap up, let's
recap the cycle. We had the hype fueled by new
tech like Mosaic and easy money from the Fed.
We had the overinvestment, the get -big -fast
madness. We had the crash, the pain, the bankruptcies,
and finally the utility that remained. It's the
classic boom -and -bust cycle, but accelerated
to Internet speed. And for you listening, the
learner, why does this matter today? Because
human nature doesn't change. We see bubbles forming
all the time. Look at the see also section of
our source material. It points to the AI boom
happening right now. It points to cryptocurrency.
The patterns are the same. This time is different
mentality. The fear of missing out. The question
you should ask yourself when you see these current
manias is, is this irrational exuberance building
something useful? Right. Is it just gambling
or is it funding a railroad? Is it building a
bridge to nowhere or a fiber optic caber to the
future? Exactly. Even if the current AI companies
go bust, will the models and the chips they are
building change the world? In the case of the
dot -com bubble, the answer was a resounding
yes. That is the final provocative thought I
want to leave you with. Was that $5 trillion
loss actually a necessary donation to build the
future? Or was it just pure gambling? I think
it was a bit of both. But we are the beneficiaries
of the gamble. We certainly are. Thank you for
diving deep with us today. It's been a wild ride
through the late 90s. Always a pleasure. We'll
see you on the next Deep Dive. Keep learning.