WEBVTT 00:00:00.000 --> 00:00:01.740 Welcome back to the Deep Dive. I hope you are 00:00:01.740 --> 00:00:03.560 sitting comfortably, and I hope you have your 00:00:03.560 --> 00:00:06.740 time travel seatbelts fastened. Yay! Because 00:00:06.740 --> 00:00:09.259 today, we're not just looking at a topic, we're 00:00:09.259 --> 00:00:13.279 going back to a very specific, a very strange 00:00:13.279 --> 00:00:15.699 vibe. It was a unique moment in human history, 00:00:15.820 --> 00:00:17.519 it really was. I want you to close your eyes 00:00:17.519 --> 00:00:20.620 for a second. Imagine a world where the coolest 00:00:20.620 --> 00:00:23.679 piece of technology you own is beige. Oh, yeah. 00:00:23.800 --> 00:00:26.500 It weighs about 50 pounds. It makes a screeching 00:00:26.500 --> 00:00:28.760 static noise when you try to talk to the world. 00:00:28.839 --> 00:00:31.160 That's the one. The song of the dial -up modem. 00:00:31.219 --> 00:00:33.960 The handshake. Exactly. And I want you to imagine 00:00:33.960 --> 00:00:36.780 a level of financial optimism that, when we look 00:00:36.780 --> 00:00:40.359 back at it now with 20 -20 hindsight, looks less 00:00:40.359 --> 00:00:45.140 like investing and more like a collective hallucination. 00:00:45.450 --> 00:00:48.570 It was a mass delusion of a very expensive party 00:00:48.570 --> 00:00:50.890 that everyone, and I mean everyone, thought would 00:00:50.890 --> 00:00:52.929 never end. We are talking, of course, about the 00:00:52.929 --> 00:00:55.289 dot -com bubble. Or the dot -com boom. Or if 00:00:55.289 --> 00:00:56.590 you want to sound like you work on Wall Street, 00:00:56.750 --> 00:01:00.590 the TMT bubble. TMT tech, media, and telecom. 00:01:00.850 --> 00:01:02.609 Which I think is actually a better name for it, 00:01:02.649 --> 00:01:04.569 right? Because dot -com makes it sound like it 00:01:04.569 --> 00:01:06.730 was just about websites. Right, and that's a 00:01:06.730 --> 00:01:08.450 crucial distinction to make right at the top. 00:01:08.769 --> 00:01:11.230 When people remember this era, they think of 00:01:11.230 --> 00:01:14.040 the sock puppet. Pets .com. They think of pets 00:01:14.040 --> 00:01:16.420 .com. They think of websites selling dog food 00:01:16.420 --> 00:01:19.700 or groceries or, you know, beanbag chairs. But 00:01:19.700 --> 00:01:22.439 the bubble wasn't just the storefronts. No. It 00:01:22.439 --> 00:01:25.659 was the entire infrastructure. It was the media 00:01:25.659 --> 00:01:28.560 companies, the telecommunications giants laying 00:01:28.560 --> 00:01:31.640 the cables, the hardware makers building the 00:01:31.640 --> 00:01:33.560 routers. I mean, it was the whole ecosystem of 00:01:33.560 --> 00:01:35.739 the future. It was the pipes, the content, and 00:01:35.739 --> 00:01:38.200 the delivery trucks. Exactly. It was a synchronized 00:01:38.200 --> 00:01:42.159 mania across three massive sectors. So to set 00:01:42.159 --> 00:01:44.159 the scene for the listener, I want to transport 00:01:44.159 --> 00:01:46.900 you to a very specific date. If you have a mental 00:01:46.900 --> 00:01:50.719 calendar, put a big red pin in Friday, March 00:01:50.719 --> 00:01:54.260 10, 2000. The peak. The absolute top of the mountain. 00:01:54.340 --> 00:01:56.879 On that specific Friday, the NASDAQ Composite 00:01:56.879 --> 00:02:01.439 Index hit 5 ,048 .62. Now, if you're not a finance 00:02:01.439 --> 00:02:04.120 person, that number might just sound like... 00:02:04.359 --> 00:02:07.219 a number. But the vibe on the street was pure 00:02:07.219 --> 00:02:10.180 euphoria. Everyone felt rich. If you had money 00:02:10.180 --> 00:02:12.000 in the market, you weren't just a saver, you 00:02:12.000 --> 00:02:14.139 were a genius. You were picking winners. And 00:02:14.139 --> 00:02:15.780 the thing is, it felt like you couldn't pick 00:02:15.780 --> 00:02:18.759 a loser. Everything was going up. But to understand 00:02:18.759 --> 00:02:21.620 just how high that mountain was, we have to look 00:02:21.620 --> 00:02:23.780 at the climb. Because mountains don't just appear 00:02:23.780 --> 00:02:26.860 overnight. No, they don't. Between 1995 and that 00:02:26.860 --> 00:02:30.080 day in March 2000, the Nasdaq didn't just double, 00:02:30.180 --> 00:02:34.419 it didn't just triple, it rose by 600%. 600 % 00:02:34.419 --> 00:02:37.280 in five years. Just let that sink in for a second. 00:02:37.620 --> 00:02:40.900 Imagine your house value going up 600 % in five 00:02:40.900 --> 00:02:43.520 years. Unimaginable. Right. If you bought a house 00:02:43.520 --> 00:02:46.719 for, say, $200 ,000, five years later it's worth 00:02:46.719 --> 00:02:49.539 $1 .2 million, you'd feel pretty good about yourself. 00:02:49.560 --> 00:02:51.319 You'd feel unstoppable. You'd probably buy a 00:02:51.319 --> 00:02:53.780 boat. You'd buy two boats. And that's basically 00:02:53.780 --> 00:02:57.280 what America did. It's staggering. It just defies 00:02:57.280 --> 00:03:00.419 gravity. But, as the old saying goes, what goes 00:03:00.419 --> 00:03:03.930 up? Must come down, and usually much faster than 00:03:03.930 --> 00:03:06.650 it went up. Gravity is a harsh mistress in the 00:03:06.650 --> 00:03:10.050 financial markets. By October 2002, so just two 00:03:10.050 --> 00:03:12.169 and a half years later, the Nasdaq had fallen 00:03:12.169 --> 00:03:16.050 78%. 78? It didn't just correct. It gave up all 00:03:16.050 --> 00:03:18.810 its gains. Five years of wealth creation. Just... 00:03:19.520 --> 00:03:22.060 evaporated. And that is usually where the story 00:03:22.060 --> 00:03:24.159 stops for most people. The standard narrative 00:03:24.159 --> 00:03:27.319 is people got greedy. They bought stupid stocks. 00:03:27.560 --> 00:03:29.740 The stocks crashed. Everyone lost money. The 00:03:29.740 --> 00:03:32.360 end. Right. It's a morality tale. It is. It's 00:03:32.360 --> 00:03:35.060 treated like a fable about greed. Don't buy hype. 00:03:35.139 --> 00:03:37.539 Don't quit your day job today. Trade all of that. 00:03:37.560 --> 00:03:40.060 But our mission on this deep dive is to go a 00:03:40.060 --> 00:03:42.069 lot deeper than that. We want to understand the 00:03:42.069 --> 00:03:43.789 mechanics of the machine. We want to look at 00:03:43.789 --> 00:03:46.169 the convergence of technology, psychology. And 00:03:46.169 --> 00:03:48.530 this is the big one. People miss government policy. 00:03:48.750 --> 00:03:51.189 The invisible hand of the government or maybe 00:03:51.189 --> 00:03:53.669 not so invisible. Exactly. We need to see how 00:03:53.669 --> 00:03:56.289 those three things combined to create this moment 00:03:56.289 --> 00:03:58.689 of what one investor called temporary insanity. 00:03:59.150 --> 00:04:01.330 And perhaps more importantly, we need to answer 00:04:01.330 --> 00:04:04.210 the big provocative question. Was it all a waste? 00:04:04.590 --> 00:04:06.569 That's the question that really stuck with me 00:04:06.569 --> 00:04:09.909 reading through the research. We see the trillions 00:04:09.909 --> 00:04:13.009 of dollars lost. But did we actually get anything 00:04:13.009 --> 00:04:15.490 for it or was it just lighting money on fire 00:04:15.490 --> 00:04:18.610 in a dumpster? It's a fascinating tradeoff because 00:04:18.610 --> 00:04:21.050 if you look at the brokerage accounts of the 00:04:21.050 --> 00:04:24.910 year 2002, it's a tragedy. It's ruined retirements. 00:04:24.990 --> 00:04:27.730 Lives changed for the worse. Yeah. But if you 00:04:27.730 --> 00:04:29.769 look at the cables in the ground, the servers 00:04:29.769 --> 00:04:32.800 in the racks, the code that was written. you 00:04:32.800 --> 00:04:35.040 might actually see the foundation of the modern 00:04:35.040 --> 00:04:37.160 world. So let's unpack this. Let's start at the 00:04:37.160 --> 00:04:38.959 beginning. Part one, the perfect storm. Yeah. 00:04:39.040 --> 00:04:40.720 Because this didn't just happen out of nowhere. 00:04:40.899 --> 00:04:43.060 No. You don't wake up one day and decide to value 00:04:43.060 --> 00:04:46.040 a company that sells nothing at a billion dollars. 00:04:46.860 --> 00:04:49.079 There were ingredients that had to come together 00:04:49.079 --> 00:04:51.379 to bake this very expensive cake. Right. You 00:04:51.379 --> 00:04:53.680 need a catalyst. You need a spark. And in this 00:04:53.680 --> 00:04:55.699 case, the catalyst was a fundamental technological 00:04:55.699 --> 00:04:58.560 shift. A huge one. We have to talk about Mosaic. 00:04:58.779 --> 00:05:03.100 Yes. 1993. The Mosaic web browser. For the younger 00:05:03.100 --> 00:05:05.779 listeners or even those who just forgot. Yeah. 00:05:05.839 --> 00:05:08.660 Because tech moves so fast before Mosaic. What 00:05:08.660 --> 00:05:10.259 was the Internet? What did it even look like? 00:05:10.620 --> 00:05:13.980 it was ugly it was text it was a green screen 00:05:13.980 --> 00:05:16.759 or a black screen with white text it was for 00:05:16.759 --> 00:05:20.360 academics the military maybe some really hardcore 00:05:20.360 --> 00:05:22.839 hobbyists who knew how to use command lines not 00:05:22.839 --> 00:05:25.120 for the average person not at all it wasn't friendly 00:05:25.120 --> 00:05:28.019 it was a tool for sharing research not a place 00:05:28.019 --> 00:05:31.060 to hang out or shop it was a utility not a destination 00:05:31.060 --> 00:05:34.720 perfect way to put it but then in 1993 you get 00:05:34.720 --> 00:05:37.759 the release of the mosaic web browser and suddenly 00:05:37.759 --> 00:05:41.139 the internet has images. Picture. It has buttons 00:05:41.139 --> 00:05:43.319 you can click with a mouse. It has color. It 00:05:43.319 --> 00:05:46.300 has a back button. It became visual. It gave 00:05:46.300 --> 00:05:48.199 the internet a face. And that changed everything 00:05:48.199 --> 00:05:51.019 because it made the web accessible to regular 00:05:51.019 --> 00:05:53.399 human beings, not just computer scientists. It 00:05:53.399 --> 00:05:55.180 was the moment the internet went from being like 00:05:55.180 --> 00:05:57.600 radio to being like television. And the adoption 00:05:57.600 --> 00:05:59.839 rates, they just reflect that shift completely. 00:06:00.040 --> 00:06:02.180 I was looking at the data here and the jump is 00:06:02.180 --> 00:06:06.360 wild. Between 1990 and 1997, the percentage of 00:06:06.360 --> 00:06:08.100 households in the United States that owned a 00:06:08.100 --> 00:06:13.920 computer That is a massive societal shift in 00:06:13.920 --> 00:06:16.019 less than a decade. I mean, think about it. You 00:06:16.019 --> 00:06:18.379 went from the computer being a luxury item. A 00:06:18.379 --> 00:06:20.699 hobbyist thing. Yeah, something maybe a wealthy 00:06:20.699 --> 00:06:23.420 person has in the den next to their telescope 00:06:23.420 --> 00:06:27.040 to a household necessity, like a fridge or a 00:06:27.040 --> 00:06:30.300 TV. Parents felt like... If they didn't get a 00:06:30.300 --> 00:06:32.379 computer, their kids would be left behind in 00:06:32.379 --> 00:06:35.060 school. And this brings up that concept of the 00:06:35.060 --> 00:06:37.800 digital divide reducing. We're seeing the birth 00:06:37.800 --> 00:06:40.759 of the information age right before our eyes. 00:06:40.899 --> 00:06:44.000 And whenever you have a shift to a new economic 00:06:44.000 --> 00:06:47.060 era, I mean, think about the shift from farming 00:06:47.060 --> 00:06:49.220 to factories or the invention of the railroad 00:06:49.220 --> 00:06:52.740 or electricity. You have a rush of capital. Right. 00:06:53.139 --> 00:06:55.740 Investors smell a paradigm shift. They don't 00:06:55.740 --> 00:06:57.360 want to miss the boat. They don't want to miss 00:06:57.360 --> 00:06:59.860 the boat. They know the world is changing and 00:06:59.860 --> 00:07:01.779 they know the people who own the infrastructure 00:07:01.779 --> 00:07:04.220 of that change become the new robber barons. 00:07:04.360 --> 00:07:06.980 But in the late 90s, it wasn't just fear of missing 00:07:06.980 --> 00:07:09.920 out. It was policy fuel. Right. The government 00:07:09.920 --> 00:07:11.759 wasn't just watching from the sidelines. They 00:07:11.759 --> 00:07:14.620 were actively pouring gas on the fire. This is 00:07:14.620 --> 00:07:16.160 the part of the research that surprised me the 00:07:16.160 --> 00:07:17.579 most. I always thought of the bubble as just 00:07:17.579 --> 00:07:21.060 crazy investors doing crazy things. But the government 00:07:21.060 --> 00:07:23.689 set the table. Oh, they set the table, cooked 00:07:23.689 --> 00:07:26.529 the meal, and served the drinks. In a few key 00:07:26.529 --> 00:07:29.449 ways. First, you had the Taxpayer Relief Act 00:07:29.449 --> 00:07:32.649 of 1997. Okay, taxpayer relief sounds boring. 00:07:32.750 --> 00:07:35.170 It sounds like something you hear on C -SPAN 00:07:35.170 --> 00:07:37.410 and fall asleep. Why was this huge? Because it 00:07:37.410 --> 00:07:39.769 lowered the top marginal capital gains tax in 00:07:39.769 --> 00:07:42.649 the U .S. Okay, break that down. ELI -5 that 00:07:42.649 --> 00:07:45.709 for me. What does that actually mean for someone 00:07:45.709 --> 00:07:48.839 sitting at home? Okay. So let's say you buy a 00:07:48.839 --> 00:07:52.259 stock for $10 and sell it for $100. You made 00:07:52.259 --> 00:07:55.040 a $90 profit. That's a capital gain. Yep. The 00:07:55.040 --> 00:07:57.980 government wants a cut of that $90. Before 1997, 00:07:58.279 --> 00:08:01.339 they took a bigger cut up to 28%. After 1997, 00:08:01.639 --> 00:08:03.980 they cut it down to 20%. So if I make money betting 00:08:03.980 --> 00:08:05.970 on stocks, I get to keep more of it. Simple as 00:08:05.970 --> 00:08:08.029 that. Precisely. And what does that do to your 00:08:08.029 --> 00:08:10.430 psychology as an investor? It incentivizes speculative 00:08:10.430 --> 00:08:13.089 investment. If the penalty for cashing out is 00:08:13.089 --> 00:08:15.589 lower and the reward is higher, you are more 00:08:15.589 --> 00:08:18.009 willing to take a risk on a high growth, unproven 00:08:18.009 --> 00:08:19.970 stock. You are willing to bet on the future. 00:08:20.209 --> 00:08:22.389 So the government basically said the casinos 00:08:22.389 --> 00:08:24.290 are open and the house is taking a smaller cut. 00:08:24.430 --> 00:08:27.540 In a way, yes. and then you have to look at the 00:08:27.540 --> 00:08:30.019 cost of the chips the cost of borrowing money 00:08:30.019 --> 00:08:32.019 interest rates interest rates were declining 00:08:32.019 --> 00:08:35.200 capital was cheap if you can borrow money for 00:08:35.200 --> 00:08:38.250 next to nothing You aren't going to keep it under 00:08:38.250 --> 00:08:40.230 the mattress. You aren't going to put it in a 00:08:40.230 --> 00:08:43.149 savings account earning 2%. You're going to invest 00:08:43.149 --> 00:08:45.429 it. You're going to chase yield. So we have low 00:08:45.429 --> 00:08:48.990 taxes on winnings and cheap money to bet with. 00:08:49.210 --> 00:08:52.250 A potent combination. And then the third leg 00:08:52.250 --> 00:08:54.710 of the stool, we have the Telecommunications 00:08:54.710 --> 00:08:57.590 Act of 1996. This is the one that really impacted 00:08:57.590 --> 00:08:59.750 the infrastructure side, right? The pipe. Huge 00:08:59.750 --> 00:09:02.919 impact. That act was the regulatory green light. 00:09:03.080 --> 00:09:05.639 The expectation was that it would unleash a wave 00:09:05.639 --> 00:09:08.600 of new technologies and competition. It basically 00:09:08.600 --> 00:09:10.980 told the telecom companies, go out there and 00:09:10.980 --> 00:09:14.460 build, compete, lay fiber, connect America. It 00:09:14.460 --> 00:09:17.100 created a gold rush mentality to profit from 00:09:17.100 --> 00:09:19.279 building the actual physical Internet. And everyone 00:09:19.279 --> 00:09:22.000 wanted to own the pipes because the logic was, 00:09:22.080 --> 00:09:23.980 I don't know which website will win, but they 00:09:23.980 --> 00:09:26.299 all need the Internet. It's the classic selling 00:09:26.299 --> 00:09:29.590 shovels in a gold rush strategy. Exactly. Except 00:09:29.590 --> 00:09:31.769 everyone started selling shovels and suddenly 00:09:31.769 --> 00:09:33.850 you had a billion shovels and, well, not enough 00:09:33.850 --> 00:09:36.090 gold. Now, there is a name that comes up a lot 00:09:36.090 --> 00:09:38.590 when we talk about this era. A man who was basically 00:09:38.590 --> 00:09:41.490 the wizard behind the curtain. Alan Greenspan. 00:09:41.830 --> 00:09:45.169 The chair of the Federal Reserve. The maestro, 00:09:45.269 --> 00:09:48.269 as Bob Woodward called him. He is often quoted 00:09:48.269 --> 00:09:52.809 as warning about irrational exuberance. I feel 00:09:52.809 --> 00:09:55.799 like that phrase is on his tombstone. He said 00:09:55.799 --> 00:09:59.379 it in a speech in 1996. He did. He asked how 00:09:59.379 --> 00:10:02.379 do we know when irrational exuberance has unduly 00:10:02.379 --> 00:10:05.720 escalated asset values? It was a warning shot. 00:10:06.080 --> 00:10:08.259 But the market ignored him. And frankly, the 00:10:08.259 --> 00:10:10.279 sources suggest his role was a bit more complicated 00:10:10.279 --> 00:10:12.100 than just being the guy ringing the warning bell. 00:10:12.200 --> 00:10:14.940 How so? Well, it's debated. But some argue he 00:10:14.940 --> 00:10:17.379 actually fueled the investment frenzy later on. 00:10:17.539 --> 00:10:19.600 There's this idea that by putting a positive 00:10:19.600 --> 00:10:23.120 spin on stock valuations, or at least not aggressively 00:10:23.120 --> 00:10:25.500 popping the bubble early on with rate hikes, 00:10:25.600 --> 00:10:27.820 he gave the market a false sense of security. 00:10:28.139 --> 00:10:31.919 The green stamp put. Right. In finance, a put 00:10:31.919 --> 00:10:34.980 option protects you from a drop in price. The 00:10:34.980 --> 00:10:38.039 Greenspan put was this psychological belief held 00:10:38.039 --> 00:10:41.240 by traders that if things got too bad, the Fed 00:10:41.240 --> 00:10:43.740 would step in and cut rates to save the market. 00:10:43.899 --> 00:10:46.139 Like a safety net. Exactly. Dad will bail us 00:10:46.139 --> 00:10:49.360 out. So if you believe the risk is limited because 00:10:49.360 --> 00:10:51.759 the Fed has your back, but the upside is unlimited 00:10:51.759 --> 00:10:53.820 because of the Internet, what do you do? You 00:10:53.820 --> 00:10:55.340 bet the house. You bet the house. So you have 00:10:55.340 --> 00:10:58.100 this perfect storm. A revolutionary technology, 00:10:58.559 --> 00:11:02.039 a computer in every third home, low taxes on 00:11:02.039 --> 00:11:05.039 profits, cheap money, and a regulatory environment 00:11:05.039 --> 00:11:07.600 that says build, build, build. It's no wonder 00:11:07.600 --> 00:11:09.320 people went a little crazy. It would have been 00:11:09.320 --> 00:11:10.980 weird if they didn't go crazy. The incentives 00:11:10.980 --> 00:11:13.759 were perfectly aligned for mania. Which brings 00:11:13.759 --> 00:11:17.100 us to part two, the new economy mindset. This 00:11:17.100 --> 00:11:19.580 is where the psychology really takes over. The 00:11:19.580 --> 00:11:21.440 mania. Because looking back, the math, like, 00:11:21.500 --> 00:11:24.330 just didn't take it. It doesn't work. I remember 00:11:24.330 --> 00:11:26.629 looking at companies back then, even as a kid, 00:11:26.750 --> 00:11:29.210 and hearing adults talk about these businesses. 00:11:29.490 --> 00:11:31.070 They don't make any money, but they're worth 00:11:31.070 --> 00:11:33.970 billions. Yeah. How did people rationalize that? 00:11:34.549 --> 00:11:36.809 How do you look at a balance sheet full of red 00:11:36.809 --> 00:11:39.970 ink and say, take my money? Because that was 00:11:39.970 --> 00:11:43.269 the old economy thinking. You see, in the new 00:11:43.269 --> 00:11:46.799 economy, profits were considered Well, almost 00:11:46.799 --> 00:11:49.980 a liability. A liability. How can making money 00:11:49.980 --> 00:11:51.820 be a bad thing? That sounds like the opposite 00:11:51.820 --> 00:11:53.960 of business. It sounds insane, but follow the 00:11:53.960 --> 00:11:56.899 logic, okay? If you were making a profit, it 00:11:56.899 --> 00:11:58.899 meant you weren't reinvesting enough in growth. 00:11:59.120 --> 00:12:01.679 It meant you were being conservative. And in 00:12:01.679 --> 00:12:03.779 a lamb grab... You don't want to be conservative. 00:12:03.960 --> 00:12:06.120 I want to capture territory. Exactly. If you 00:12:06.120 --> 00:12:07.940 have a profit margin, it means you charge too 00:12:07.940 --> 00:12:10.139 much and didn't acquire enough customers. The 00:12:10.139 --> 00:12:12.759 metric wasn't price to earnings or P .E. That 00:12:12.759 --> 00:12:15.019 was for, you know, Ford and Procter and Gamble. 00:12:15.100 --> 00:12:17.820 That was for boring businesses. Right. Traditional 00:12:17.820 --> 00:12:20.200 metrics were just thrown out the window. P .E. 00:12:20.200 --> 00:12:22.500 is for losers. Just look at the P .E. ratio of 00:12:22.500 --> 00:12:25.519 the Nasdaq at the peak. It reached 200. 200. 00:12:25.799 --> 00:12:27.360 OK, break that down for me. What does that even 00:12:27.360 --> 00:12:30.350 mean? It means that for every dollar of profit 00:12:30.350 --> 00:12:33.250 these companies made, investors were paying $200 00:12:33.250 --> 00:12:37.090 for the stock. Essentially, at that rate, assuming 00:12:37.090 --> 00:12:39.590 earnings stayed flat, it would take you 200 years 00:12:39.590 --> 00:12:42.450 to earn back your investment. That is optimistic. 00:12:42.690 --> 00:12:44.929 It's beyond optimistic. It's theological. It 00:12:44.929 --> 00:12:47.840 requires faith. Wow. To put that in perspective, 00:12:48.200 --> 00:12:50.720 let's look at the Japanese asset bubble of 1991 00:12:50.720 --> 00:12:54.500 that was famous for being massive. The grounds 00:12:54.500 --> 00:12:57.019 of the Imperial Palace in Tokyo were rumored 00:12:57.019 --> 00:12:59.000 to be worth more than all the real estate in 00:12:59.000 --> 00:13:00.820 California. Right. Massive bubble. I remember 00:13:00.820 --> 00:13:03.200 that. At the peak of that bubble, the P .E. only 00:13:03.200 --> 00:13:05.779 reached 80. So the dot -com bubble was two and 00:13:05.779 --> 00:13:07.980 a half times more expensive relative to earnings 00:13:07.980 --> 00:13:10.279 than the Japanese bubble. That is the definition 00:13:10.279 --> 00:13:12.379 of insanity. And it wasn't just the index. It 00:13:12.379 --> 00:13:14.659 was specific stocks. I mean, look at Qualcomm. 00:13:14.840 --> 00:13:17.639 Oh, Qualcomm, the chip maker. In 1999 alone, 00:13:17.840 --> 00:13:22.399 a single year, Qualcomm shares rose 2 ,619%. 00:13:22.399 --> 00:13:28.299 2 ,619%. So imagine putting $1 ,000 into Qualcomm 00:13:28.299 --> 00:13:32.070 in January. Maybe your holiday bonus. And having 00:13:32.070 --> 00:13:35.169 over $26 ,000 in December. You'd feel like a 00:13:35.169 --> 00:13:37.450 genius. You'd quit your job. You'd tell everyone 00:13:37.450 --> 00:13:39.809 at the bar how smart you are. And it wasn't just 00:13:39.809 --> 00:13:43.470 one outlier. No. There were 12 other large cap 00:13:43.470 --> 00:13:46.389 stocks that rose over 1 ,000 % that year. It 00:13:46.389 --> 00:13:48.970 seemed easy. And the secret sauce seemed to be 00:13:48.970 --> 00:13:52.519 the name. The magic suffix. The dot com. It was 00:13:52.519 --> 00:13:55.639 like magic dust. Investors were eager to throw 00:13:55.639 --> 00:13:57.740 money at anything with an internet prefix or 00:13:57.740 --> 00:13:59.879 a dot com at the end. There were studies done 00:13:59.879 --> 00:14:02.320 on this. You could take a boring mining company, 00:14:02.559 --> 00:14:05.460 change the name to mining .com or e -mining, 00:14:05.600 --> 00:14:07.899 and the stock would pop. Just for the name change. 00:14:08.330 --> 00:14:10.450 No business change. Just for the name. No change 00:14:10.450 --> 00:14:12.809 in business model. Just the signaling that we 00:14:12.809 --> 00:14:14.629 get it. It was like canting racing stripes on 00:14:14.629 --> 00:14:16.809 a turtle and calling it a race car. But there 00:14:16.809 --> 00:14:18.629 was a logic to it, right? I mean, smart people 00:14:18.629 --> 00:14:20.909 were doing this. Venture capitalists, hedge funds. 00:14:21.090 --> 00:14:23.470 It wasn't just random gambling. There was a business 00:14:23.470 --> 00:14:27.590 strategy driving this valuation. Yes. The strategy 00:14:27.590 --> 00:14:32.889 was get big fast. Or sometimes get large or get 00:14:32.889 --> 00:14:35.559 lost. It sounds like a threat. It basically was. 00:14:35.720 --> 00:14:38.279 The theory was based on network effects. The 00:14:38.279 --> 00:14:40.860 idea that the value of a network goes up as more 00:14:40.860 --> 00:14:43.759 users join. Think about a fax machine. Right. 00:14:43.860 --> 00:14:47.679 One fax machine is useless. Two are OK. A million 00:14:47.679 --> 00:14:50.059 are indispensable. If you're the only one with 00:14:50.059 --> 00:14:52.139 email, who are you emailing? Exactly. So the 00:14:52.139 --> 00:14:55.379 goal was to grab as much mind share and market 00:14:55.379 --> 00:14:57.960 share as possible immediately. You wanted to 00:14:57.960 --> 00:14:59.960 be the standard. You wanted to be the verb. You 00:14:59.960 --> 00:15:01.559 wanted people to say Google it, although Google 00:15:01.559 --> 00:15:03.639 wasn't public yet. You wanted to be the Amazon 00:15:03.639 --> 00:15:06.919 of whatever. Pet food. And how do you do that? 00:15:06.980 --> 00:15:10.320 You spend massive amounts on advertising. You 00:15:10.320 --> 00:15:12.240 sell your product for free or at a deep discount. 00:15:12.440 --> 00:15:15.539 You accept huge net operating losses. So you 00:15:15.539 --> 00:15:18.029 lose money on every sale. But you make it up 00:15:18.029 --> 00:15:19.970 in volume. You make it up in future dominance. 00:15:20.070 --> 00:15:22.370 That was the theory. The thinking was once we 00:15:22.370 --> 00:15:24.509 own the market, once we are the only pet food 00:15:24.509 --> 00:15:27.009 store online, then we can raise prices. Then 00:15:27.009 --> 00:15:29.789 we can turn on the profit tap. Oh. But first, 00:15:29.929 --> 00:15:32.990 we have to kill the competition with cash. We 00:15:32.990 --> 00:15:35.570 have to scorch the earth so no one else can grow. 00:15:35.750 --> 00:15:38.620 It's a war of attrition. I can bleed longer than 00:15:38.620 --> 00:15:41.200 you can. It is. And that cash was being spent 00:15:41.200 --> 00:15:43.720 on more than just customer acquisition. The lifestyle 00:15:43.720 --> 00:15:47.159 of the dot -com era is legendary. Dot -com party. 00:15:47.419 --> 00:15:50.460 It became a symbol of the excess. Companies that 00:15:50.460 --> 00:15:53.039 had never made a dime would throw these lavish 00:15:53.039 --> 00:15:56.279 launch parties. Open bars, celebrities, expensive 00:15:56.279 --> 00:15:59.259 offices in the best parts of town. The beanbag 00:15:59.259 --> 00:16:03.070 chairs. The foosball tables. And the Aeron chair. 00:16:03.149 --> 00:16:05.090 We have to talk about the Aeron chair. I feel 00:16:05.090 --> 00:16:06.970 like the Aeron chair is the unofficial mascot 00:16:06.970 --> 00:16:08.970 of the bubble. It really is that Herman Miller 00:16:08.970 --> 00:16:12.370 mesh chair. It cost over $1 ,000. And suddenly, 00:16:12.429 --> 00:16:15.009 every startup with three employees and a domain 00:16:15.009 --> 00:16:18.090 name had 20 of them. Why that chair? What was 00:16:18.090 --> 00:16:20.129 the deal with that? It became the throne of the 00:16:20.129 --> 00:16:22.789 dot com CEO. It was about projecting an aura 00:16:22.789 --> 00:16:25.690 of invincibility. We are the new economy. We 00:16:25.690 --> 00:16:28.110 play by different rules. We don't sit in stuffy 00:16:28.110 --> 00:16:30.629 leather chairs like the old bankers. We sit in 00:16:30.629 --> 00:16:33.769 a high tech mesh. We are the future. It was a 00:16:33.769 --> 00:16:36.289 status symbol. A huge one. And the marketing 00:16:36.289 --> 00:16:38.509 madness. I think it really reached its peak at 00:16:38.509 --> 00:16:40.350 the Super Bowl. The Super Bowl is always a good 00:16:40.350 --> 00:16:42.509 barometer of where the loose money is. Oh, yeah. 00:16:42.830 --> 00:16:45.309 If you want to know who has too much cash. Look 00:16:45.309 --> 00:16:47.950 at the commercials. Exactly. In January 2000, 00:16:48.269 --> 00:16:51.769 for Super Bowl XXXIV, dot -com companies bought 00:16:51.769 --> 00:16:55.549 between 12 and 19 of the 61 available ad spots. 00:16:55.850 --> 00:16:57.929 That's almost a third of the Super Bowl. And 00:16:57.929 --> 00:17:00.690 these spots cost, what, like $2 million for 30 00:17:00.690 --> 00:17:03.669 seconds back then? Roughly. So you have companies, 00:17:03.909 --> 00:17:06.289 again, with little to no revenue, burning millions 00:17:06.289 --> 00:17:08.650 on a 30 -second spot. Right. You had E -Trade. 00:17:08.650 --> 00:17:11.839 You had Monster .com. And you had Pets .com. 00:17:11.900 --> 00:17:14.539 And just to show you how quickly the tide turned 00:17:14.539 --> 00:17:17.779 by January 2001, the next Super Bowl. How many? 00:17:17.819 --> 00:17:21.039 Only three dot com spot spots. Wow. From taking 00:17:21.039 --> 00:17:23.259 over the broadcast to barely existing in one 00:17:23.259 --> 00:17:26.339 year. And we can't talk about ads without mentioning 00:17:26.339 --> 00:17:28.900 the sock puppet. Pets .com. The poster child 00:17:28.900 --> 00:17:32.039 of the bubble. A very cute mascot. A very recognized 00:17:32.039 --> 00:17:34.240 brand. People loved the puppet. He was everywhere. 00:17:34.359 --> 00:17:36.299 He was on Good Morning America, wasn't he? He 00:17:36.299 --> 00:17:39.450 was. But the business. The business. The business 00:17:39.450 --> 00:17:42.150 model involved shipping heavy bags of dog food 00:17:42.150 --> 00:17:44.930 across the country via FedEx. Which is expensive. 00:17:45.470 --> 00:17:47.950 Dog food is heavy. It's incredibly expensive. 00:17:48.329 --> 00:17:50.329 And they were selling the food for less than 00:17:50.329 --> 00:17:52.869 it cost to buy and ship it. Wait, wait. Yes. 00:17:53.029 --> 00:17:55.410 It was the ultimate example of get big fast, 00:17:55.650 --> 00:17:58.450 without a plan to get profitable ever. Every 00:17:58.450 --> 00:18:01.069 time someone bought a bag of dog food, Bets .com 00:18:01.069 --> 00:18:03.849 lost money. So the more successful they were 00:18:03.849 --> 00:18:06.430 at marketing, the faster they went broke. Precisely. 00:18:06.430 --> 00:18:09.220 They were marketing their own suicide. And while 00:18:09.220 --> 00:18:11.859 the companies were doing this, the regular people, 00:18:11.960 --> 00:18:14.259 the retail investors, were eating it up. This 00:18:14.259 --> 00:18:16.579 was the era of the day trader. It was unprecedented. 00:18:17.059 --> 00:18:19.619 Before this, stock trading was for guys in suits 00:18:19.619 --> 00:18:22.440 on Wall Street. Now, you had stories of people 00:18:22.440 --> 00:18:24.720 quitting their steady jobs, doctors, lawyers, 00:18:24.920 --> 00:18:27.259 factory workers, to sit at home and trade stocks 00:18:27.259 --> 00:18:30.019 on their bulky PCs. Because it seemed easy. You 00:18:30.019 --> 00:18:32.039 buy in the morning, it goes up 10 % by lunch, 00:18:32.140 --> 00:18:35.660 you sell. Why work a 9 to 5? And the media played 00:18:35.660 --> 00:18:39.000 a huge role in this. CNBC became the background 00:18:39.000 --> 00:18:41.700 noise of America. They reported on the market 00:18:41.700 --> 00:18:44.680 with the suspense of a sports event. It was play 00:18:44.680 --> 00:18:47.420 -by -play action, pickers scrolling, flashing 00:18:47.420 --> 00:18:50.359 red and green. It validated the mania. If it's 00:18:50.359 --> 00:18:53.160 on TV, it must be real. Even the Wall Street 00:18:53.160 --> 00:18:55.779 Journal, the bastion of financial conservatism, 00:18:55.779 --> 00:18:58.240 ran an article suggesting that investors should 00:18:58.240 --> 00:19:01.940 rethink the quaint idea of profits. When the 00:19:01.940 --> 00:19:04.380 Wall Street Journal calls profits quaint, you 00:19:04.380 --> 00:19:07.220 know you are in a bubble. That's the sign. It's 00:19:07.220 --> 00:19:09.859 like a doctor calling a heartbeat optional. Absolutely. 00:19:10.400 --> 00:19:12.380 Now, I want to pivot to something that often 00:19:12.380 --> 00:19:14.740 gets overlooked in this story. We focus so much 00:19:14.740 --> 00:19:17.519 on the websites, the pets .coms and the e -toys, 00:19:17.519 --> 00:19:19.940 but there was a massive bubble happening underneath 00:19:19.940 --> 00:19:22.730 them. Part three. The telecom bubble. The invisible 00:19:22.730 --> 00:19:25.049 backbone. You can't have a website without the 00:19:25.049 --> 00:19:26.769 pipes to deliver it. And the investment here 00:19:26.769 --> 00:19:28.690 was even bigger than in the sock puppets. Oh, 00:19:28.730 --> 00:19:31.170 much bigger in terms of hard assets. We talked 00:19:31.170 --> 00:19:34.049 about that 1996 Telecom Act. In the five years 00:19:34.049 --> 00:19:35.869 following that, telecommunications equipment 00:19:35.869 --> 00:19:40.009 companies invested over $500 billion. $500 billion. 00:19:40.930 --> 00:19:44.809 That's half a trillion. In five years. In fiber 00:19:44.809 --> 00:19:48.410 optic cables, switches, wireless networks. They 00:19:48.410 --> 00:19:50.849 were digging up streets in every major city. 00:19:50.970 --> 00:19:53.289 They were laying cables across the Atlantic and 00:19:53.289 --> 00:19:55.750 Pacific oceans. I remember seeing the spools 00:19:55.750 --> 00:19:58.289 of orange conduit everywhere on the side of the 00:19:58.289 --> 00:20:00.349 road. It felt like the whole world was under 00:20:00.349 --> 00:20:03.490 construction. Yes, that was the physical manifestation 00:20:03.490 --> 00:20:06.369 of the bubble. And most of this was financed 00:20:06.369 --> 00:20:08.869 with heavy debt. They were borrowing billions 00:20:08.869 --> 00:20:12.539 to dig holes. Why? What was the logic? They were 00:20:12.539 --> 00:20:14.980 betting on a specific statistic. There was a 00:20:14.980 --> 00:20:17.779 widely circulated myth, a report that came out 00:20:17.779 --> 00:20:20.140 claiming that Internet traffic was doubling every 00:20:20.140 --> 00:20:23.079 hundred days. Every hundred days. That's massive 00:20:23.079 --> 00:20:25.599 exponential growth. That was the claim. If that 00:20:25.599 --> 00:20:28.299 were true, within a few years, the entire population 00:20:28.299 --> 00:20:30.160 of the Earth wouldn't be able to generate enough 00:20:30.160 --> 00:20:32.759 data to fill the pipes. But it wasn't true. It 00:20:32.759 --> 00:20:35.220 was true for a very short period in the mid -90s, 00:20:35.220 --> 00:20:37.420 but then it slowed down significantly. But the 00:20:37.420 --> 00:20:39.599 companies built their models as if it would double 00:20:39.599 --> 00:20:42.269 every 100 days forever. So they were building 00:20:42.269 --> 00:20:44.609 a 10 -lane highway for a dirt route's worth of 00:20:44.609 --> 00:20:47.250 traffic. Exactly. They were building for 2010 00:20:47.250 --> 00:20:50.750 demand in 1999. And just like the dot -coms, 00:20:50.750 --> 00:20:53.690 governments saw dollar signs here, too. Specifically 00:20:53.690 --> 00:20:55.769 with spectrum auctions. Right. This is where 00:20:55.769 --> 00:20:58.789 companies bid for the rights to use radio frequencies 00:20:58.789 --> 00:21:02.190 for mobile phones. The airwaves. Exactly. Specifically 00:21:02.190 --> 00:21:04.849 for 3G, the third generation of mobile data. 00:21:05.029 --> 00:21:08.210 In the UK, in April 2000, the government held 00:21:08.210 --> 00:21:11.970 an auction for this spectrum. It raised 22 .5 00:21:11.970 --> 00:21:15.349 billion pounds. That is a staggering amount of 00:21:15.349 --> 00:21:18.410 money for thin air. Literally thin air. Radio 00:21:18.410 --> 00:21:21.809 waves. And in Germany, in August 2000, it was 00:21:21.809 --> 00:21:24.710 even higher, 30 billion pounds. These telecom 00:21:24.710 --> 00:21:26.990 companies were spending billions just for the 00:21:26.990 --> 00:21:28.730 permission to operate before they even built 00:21:28.730 --> 00:21:31.410 a single tower. It was the winner's curse. To 00:21:31.410 --> 00:21:33.670 win the option, you had to overpay. If you didn't 00:21:33.670 --> 00:21:35.210 win, you were out of business because you had 00:21:35.210 --> 00:21:37.210 no spectrum. If you did win, you were saddled 00:21:37.210 --> 00:21:38.910 with so much debt, you might go out of business 00:21:38.910 --> 00:21:41.069 anyway. Damned if you do, damned if you don't. 00:21:41.369 --> 00:21:43.460 Precisely. But the U .S. had a bit of a hiccup 00:21:43.460 --> 00:21:45.740 with this, didn't they? A massive failure, actually. 00:21:45.920 --> 00:21:49.140 A 1999 auction had to be rerun because the winners 00:21:49.140 --> 00:21:52.299 defaulted on $4 billion worth of bids. They bid 00:21:52.299 --> 00:21:54.579 money they didn't have. You simply couldn't pay. 00:21:54.819 --> 00:21:56.940 That should have been a warning sign, a huge 00:21:56.940 --> 00:21:59.940 flashing red light. It should have been. But 00:21:59.940 --> 00:22:01.660 the party was too loud. No one could hear the 00:22:01.660 --> 00:22:04.079 warning. The problem was simple supply and demand. 00:22:04.440 --> 00:22:07.319 The telecom companies built enough capacity for 00:22:07.319 --> 00:22:09.579 a future that was 10 years away, not two years 00:22:09.579 --> 00:22:12.579 away. supply vastly outstripped demand. And when 00:22:12.579 --> 00:22:15.099 the crash came, who got hurt the most? The bond 00:22:15.099 --> 00:22:17.059 investors. The people who lent the money for 00:22:17.059 --> 00:22:19.259 all this infrastructure. Right. Not the stockholders, 00:22:19.359 --> 00:22:21.579 the debt holders. Yeah. They ended up recovering 00:22:21.579 --> 00:22:24.680 only about 20 % of their investments. Ouch. So 00:22:24.680 --> 00:22:27.460 we have the tech mania, the telecom debt bomb, 00:22:27.680 --> 00:22:30.640 and then we reach the summit, part four, the 00:22:30.640 --> 00:22:34.960 peak and the smart money. March 10, 2000. NASDAQ 00:22:34.960 --> 00:22:38.799 5 ,048 .62. Right. But there was a moment just 00:22:38.799 --> 00:22:41.559 before that in January that really signaled the 00:22:41.559 --> 00:22:43.880 peak for a lot of people. The AOL Time Warner 00:22:43.880 --> 00:22:46.500 merger. The deal of the century. Announced January 00:22:46.500 --> 00:22:48.980 10, 2000. It was the largest merger to date. 00:22:49.099 --> 00:22:52.740 What was it? A $350 billion combined value? Something 00:22:52.740 --> 00:22:55.460 like that. It was enormous. You had AOL America 00:22:55.460 --> 00:22:58.720 Online, the new money internet service provider. 00:22:58.960 --> 00:23:01.460 The company sending those CDs to your mailbox 00:23:01.460 --> 00:23:03.680 every week. And they were buying Time Warner. 00:23:04.119 --> 00:23:07.779 The old media giant. Movies, magazines, cable 00:23:07.779 --> 00:23:11.319 news, Warner Brothers. An institution. It felt 00:23:11.319 --> 00:23:13.779 upside down, the upstart buying the giant. At 00:23:13.779 --> 00:23:16.220 the time, the true believers saw it as the ultimate 00:23:16.220 --> 00:23:18.680 victory of the internet. The new economy was 00:23:18.680 --> 00:23:22.119 literally swallowing the old economy. AOL was 00:23:22.119 --> 00:23:24.799 using its inflated stock currency to buy real 00:23:24.799 --> 00:23:28.000 assets. But skeptics saw it differently. The 00:23:28.000 --> 00:23:30.180 smart money looked at that and said, this is 00:23:30.180 --> 00:23:32.859 the top. Why? What was the signal? Because when 00:23:32.859 --> 00:23:35.380 the bubble company buys the real company, it's 00:23:35.380 --> 00:23:37.319 usually a sign that the bubble company knows 00:23:37.319 --> 00:23:40.019 its stock is overvalued. They want to cash it 00:23:40.019 --> 00:23:42.099 in for something tangible before the music stops. 00:23:42.299 --> 00:23:43.980 It's like if I have a winning lottery ticket 00:23:43.980 --> 00:23:45.759 that I know is fake, but I trade it for your 00:23:45.759 --> 00:23:48.180 house before you figure it out. That is a perfect 00:23:48.180 --> 00:23:50.960 analogy. AOL knew their stock price was fantasy. 00:23:51.160 --> 00:23:53.480 They wanted to trade that fantasy paper for Time 00:23:53.480 --> 00:23:55.900 Warner's real assets, copyrights, cables, studios. 00:23:56.319 --> 00:23:58.160 And speaking of cashing in, let's talk about 00:23:58.160 --> 00:24:00.559 the insiders. Because while retail investors 00:24:00.559 --> 00:24:03.759 were buying, the people inside these companies, 00:24:03.900 --> 00:24:07.660 the ones who saw the books, were itching to sell. 00:24:08.029 --> 00:24:09.630 But they couldn't always sell immediately, right? 00:24:09.750 --> 00:24:12.309 There were lockup periods. Right. What is a lockup 00:24:12.309 --> 00:24:14.950 period? Usually after an IPO, an initial public 00:24:14.950 --> 00:24:17.470 offering, employees and founders have to wait 00:24:17.470 --> 00:24:20.309 often six months before they can sell their shares. 00:24:20.490 --> 00:24:22.910 It's to prevent the stock from crashing on day 00:24:22.910 --> 00:24:25.470 one from everyone selling. So they were paper 00:24:25.470 --> 00:24:27.670 millionaires. They could look at the screen and 00:24:27.670 --> 00:24:29.829 see they were worth $10 million, but they couldn't 00:24:29.829 --> 00:24:32.440 buy a sandwich with it. Not yet. Correct. And 00:24:32.440 --> 00:24:34.819 this created a predictable pattern that some 00:24:34.819 --> 00:24:37.960 very smart investors exploited. Enter Sir John 00:24:37.960 --> 00:24:40.900 Templeton. A legendary investor. He was in his 00:24:40.900 --> 00:24:43.579 80s at this point. He looked at this market and 00:24:43.579 --> 00:24:46.759 called it temporary insanity. He saw a once in 00:24:46.759 --> 00:24:48.759 a lifetime opportunity. To make money on the 00:24:48.759 --> 00:24:51.220 way down. Exactly. What was his strategy? He 00:24:51.220 --> 00:24:54.339 shorted dot com stocks just before the lockup 00:24:54.339 --> 00:24:56.960 periods expired. Shorting means betting the price 00:24:56.960 --> 00:25:01.029 will go down. Yeah. He correctly predicted that 00:25:01.029 --> 00:25:03.349 as soon as that six -month window opened, the 00:25:03.349 --> 00:25:05.609 insiders, who knew the company wasn't making 00:25:05.609 --> 00:25:08.210 any money, would rush to dump their stock to 00:25:08.210 --> 00:25:10.569 buy houses and cars. He was betting on human 00:25:10.569 --> 00:25:13.109 nature. He knew the employees would want to cash 00:25:13.109 --> 00:25:15.569 out their lottery tickets. And that flood of 00:25:15.569 --> 00:25:17.890 selling would crash the price. And he made a 00:25:17.890 --> 00:25:20.450 fortune doing it. He made, what, $86 million 00:25:20.450 --> 00:25:23.190 in a few months betting against the bubble? And 00:25:23.190 --> 00:25:25.009 he wasn't the only one getting out. Mark Cuban. 00:25:25.579 --> 00:25:29.319 the famous entrepreneur. He sold Broadcast .com 00:25:29.319 --> 00:25:32.039 to Yahoo for billions in stock. But he didn't 00:25:32.039 --> 00:25:34.160 just hold the Yahoo stock, did he? No, he knew 00:25:34.160 --> 00:25:36.380 Yahoo was overvalued too. So he entered into 00:25:36.380 --> 00:25:39.410 hedges, specifically callers. to protect his 00:25:39.410 --> 00:25:42.269 gains. He essentially locked in his billion -dollar 00:25:42.269 --> 00:25:44.589 status regardless of what the market did. If 00:25:44.589 --> 00:25:46.670 Yahoo crashed, he was safe. Smart. And then you 00:25:46.670 --> 00:25:49.150 have the telecom execs, the guys building the 00:25:49.150 --> 00:25:52.529 pipes. Philip Anschutz sold $1 .9 billion worth 00:25:52.529 --> 00:25:55.710 of stock. A billion. Joseph Nakio, $248 million. 00:25:55.990 --> 00:25:59.430 Gary Winnick, $748 million. They were selling 00:25:59.430 --> 00:26:01.349 hundreds of millions of dollars worth of stock 00:26:01.349 --> 00:26:03.410 before the crash. Which tells you everything 00:26:03.410 --> 00:26:05.309 you need to know about what they thought of their 00:26:05.309 --> 00:26:08.200 own valuations. If they believe the hype, They 00:26:08.200 --> 00:26:10.480 would have held on. They sold. So the smart money 00:26:10.480 --> 00:26:12.700 is heading for the exits. The insiders are waiting 00:26:12.700 --> 00:26:16.440 to dump. The timeline is ticking. And then the 00:26:16.440 --> 00:26:20.119 triggers start to pull. Part five, the burst. 00:26:20.480 --> 00:26:22.940 It wasn't one single thing. It was a cascade, 00:26:23.200 --> 00:26:27.019 a death spiral. It started in March 2000. First, 00:26:27.140 --> 00:26:31.180 there was Y2K. Remember Y2K, the millennium bug. 00:26:31.440 --> 00:26:33.099 Everyone thought the computers were going to 00:26:33.099 --> 00:26:36.369 crash at midnight on January 2000. Planes falling 00:26:36.369 --> 00:26:38.910 out of the sky, toasters attacking people. Right. 00:26:38.990 --> 00:26:41.869 So companies spent billions upgrading their systems 00:26:41.869 --> 00:26:44.970 in 1998 and 1999 to prevent this. They bought 00:26:44.970 --> 00:26:47.410 new servers, new software. And then nothing happened. 00:26:47.470 --> 00:26:49.210 Nothing happened, which was great for society, 00:26:49.390 --> 00:26:52.150 but bad for tech earnings. Once the clock struck 00:26:52.150 --> 00:26:54.910 midnight, that spending stopped. It fell off 00:26:54.910 --> 00:26:56.710 a cliff. Because they had already bought everything 00:26:56.710 --> 00:26:59.349 they needed. Exactly. Suddenly. Tech companies 00:26:59.349 --> 00:27:01.609 saw their orders dry up. They'd pulled all their 00:27:01.609 --> 00:27:05.289 future revenue into 1999. Then, on March 13, 00:27:05.769 --> 00:27:07.910 news broke that Japan had entered a recession. 00:27:08.269 --> 00:27:11.450 That triggered a global sell -off. It made investors 00:27:11.450 --> 00:27:14.410 nervous. The global economy wasn't as bulletproof 00:27:14.410 --> 00:27:16.849 as they thought. Then, exactly one week later, 00:27:16.950 --> 00:27:19.369 March 20, Barron's Magazine publishes a cover 00:27:19.369 --> 00:27:21.940 story. Burning Up. That was the headline. The 00:27:21.940 --> 00:27:24.059 article warned that Internet companies were running 00:27:24.059 --> 00:27:26.980 out of cash fast. It analyzed the burn rate of 00:27:26.980 --> 00:27:29.579 207 Internet companies. And what did they find? 00:27:29.759 --> 00:27:32.160 They predicted that 51 of them would run out 00:27:32.160 --> 00:27:35.000 of cash within 12 months. It was a splash of 00:27:35.000 --> 00:27:37.420 cold water in the face of the market. It basically 00:27:37.420 --> 00:27:40.680 said the emperor has no clothes and also no cash. 00:27:40.900 --> 00:27:44.339 And on that same day. MicroStrategy. A huge high 00:27:44.339 --> 00:27:47.460 -flyer software company. They announced a revenue 00:27:47.460 --> 00:27:49.579 restatement. Which is a polite way of saying. 00:27:49.759 --> 00:27:51.799 They admitted to aggressive accounting practices. 00:27:51.980 --> 00:27:54.140 They had been booking revenue they hadn't actually 00:27:54.140 --> 00:27:55.940 earned yet. Took it in the books. Essentially. 00:27:56.059 --> 00:27:59.960 Their stock fell 62 % in a single day. Wow. From 00:27:59.960 --> 00:28:05.400 $333 down to $140. 62 % in a day. That shatters 00:28:05.400 --> 00:28:07.839 confidence. Because if MicroStrategy is lying, 00:28:08.059 --> 00:28:10.900 who else is? Exactly. The trust evaporated. And 00:28:10.900 --> 00:28:13.579 the hits kept coming. April 3, the Microsoft 00:28:13.579 --> 00:28:16.619 case. Judge Thomas Penfield Jackson. He ruled 00:28:16.619 --> 00:28:19.259 that Microsoft was guilty of monopolization and 00:28:19.259 --> 00:28:21.759 violation of the Sherman Antitrust Act. This 00:28:21.759 --> 00:28:24.559 is the Titan attack. If Microsoft can be broken 00:28:24.559 --> 00:28:26.779 up by the government, no one is safe. Microsoft 00:28:26.779 --> 00:28:29.720 shares dropped 15 % in a day. The Nasdaq dropped 00:28:29.720 --> 00:28:33.500 8%. The whole sector got hit. And then the final 00:28:33.500 --> 00:28:36.240 nail in the coffin. And this is the one that 00:28:36.240 --> 00:28:41.220 really hurts to hear about. Tax day. This is 00:28:41.220 --> 00:28:44.119 the tragic irony of the bubble. This is where 00:28:44.119 --> 00:28:46.539 the retail investor really got crushed. Explain 00:28:46.539 --> 00:28:48.960 this dynamic because it's just cruel. In 1999, 00:28:49.299 --> 00:28:51.960 people made massive capital gains. They sold 00:28:51.960 --> 00:28:54.599 stocks. They made millions on paper or in cash. 00:28:54.839 --> 00:28:57.359 They felt rich. But by April 2000, the market 00:28:57.359 --> 00:29:00.390 was sliding. Hard. But they still owe taxes on 00:29:00.390 --> 00:29:03.289 the gains from 1999. The IRS works on a calendar 00:29:03.289 --> 00:29:05.630 year. The IRS doesn't care that you lost money 00:29:05.630 --> 00:29:07.849 in March 2000. They want their cut of what you 00:29:07.849 --> 00:29:10.549 made in December 1999. Right. So imagine you 00:29:10.549 --> 00:29:13.230 made $100 ,000 in 1999. You owe the government 00:29:13.230 --> 00:29:15.769 maybe $20 ,000. But you reinvested that money 00:29:15.769 --> 00:29:17.210 into the market in January because you thought 00:29:17.210 --> 00:29:19.849 it would go up forever. By April, that $100 ,000 00:29:19.849 --> 00:29:22.369 is now worth $10 ,000. But you still owe the 00:29:22.369 --> 00:29:25.710 government $20 ,000. But you still owe the government 00:29:25.710 --> 00:29:29.859 $20 ,000. Exactly. You are mathematically insolvent. 00:29:29.900 --> 00:29:32.700 You are bankrupt. And to pay the tax bill, investors 00:29:32.700 --> 00:29:35.480 were forced to sell their crashing stocks. Selling 00:29:35.480 --> 00:29:37.819 begets selling. It creates a downward pressure. 00:29:38.319 --> 00:29:40.720 Everyone is rushing for the exit at the same 00:29:40.720 --> 00:29:43.180 time to pay Uncle Sam. Which caused the market 00:29:43.180 --> 00:29:45.619 to crash even further. On that Friday, April 00:29:45.619 --> 00:29:49.619 14th, the Nasdaq fell 9%. It ended a week where 00:29:49.619 --> 00:29:52.920 it fell 25%. A quarter of the value gone in a 00:29:52.920 --> 00:29:55.119 single week. And that was it. The death spiral 00:29:55.119 --> 00:29:58.559 really set in. Capital dried up. No one wanted 00:29:58.559 --> 00:30:00.960 to invest anymore. The metric shifted from how 00:30:00.960 --> 00:30:03.960 many eyeballs do you have to what is your burn 00:30:03.960 --> 00:30:05.980 rate? Burn rate. How fast are you dying? Exactly. 00:30:06.039 --> 00:30:08.240 How many months until the cash runs out? And 00:30:08.240 --> 00:30:11.099 for many, the answer was not many. Tets .com. 00:30:11.140 --> 00:30:13.819 Gone. Nine months after its IPO, it was out of 00:30:13.819 --> 00:30:17.339 business. Webvan. Boo .com. WorldCom, North Point 00:30:17.339 --> 00:30:20.460 Communications, Global Crossing. Bankruptcies 00:30:20.460 --> 00:30:23.160 everywhere. By November 2000, internet stocks 00:30:23.160 --> 00:30:27.460 were down 75%. $1 .755 trillion in value was 00:30:27.460 --> 00:30:29.220 wiped out. And the big guys weren't spared either. 00:30:29.460 --> 00:30:32.500 Cisco. Cisco Systems, which was briefly the most 00:30:32.500 --> 00:30:34.740 valuable company in the world, lost 80 % of its 00:30:34.740 --> 00:30:38.480 stock value. 80%. Imagine owning the safest stock 00:30:38.480 --> 00:30:40.920 in the sector, the guys making the routers, and 00:30:40.920 --> 00:30:44.509 losing 80%. It was total devastation. Which brings 00:30:44.509 --> 00:30:47.829 us to part six, aftermath and legacy. When the 00:30:47.829 --> 00:30:50.450 smoke cleared, what was left? Well, there were 00:30:50.450 --> 00:30:53.230 casualties, real human casualties. The job market 00:30:53.230 --> 00:30:55.710 for programmers collapsed. There was a glut of 00:30:55.710 --> 00:30:57.930 office equipment. We mentioned the errand chair 00:30:57.930 --> 00:31:00.210 earlier. Right. After the crash, you could pick 00:31:00.210 --> 00:31:03.869 up an $1 ,100 errand chair for pennies on the 00:31:03.869 --> 00:31:06.829 dollar from liquidators. It became the symbol 00:31:06.829 --> 00:31:09.069 of the failed startup. And university enrollment 00:31:09.069 --> 00:31:11.710 in computer -related degrees dropped noticeably. 00:31:11.829 --> 00:31:14.259 People thought. Tech is over. It was a fad. Can 00:31:14.259 --> 00:31:16.799 you imagine thinking computers were a fad? But 00:31:16.799 --> 00:31:18.380 that was a sentiment. The Internet thing didn't 00:31:18.380 --> 00:31:20.559 work out. And then came the scandals. When the 00:31:20.559 --> 00:31:22.279 tide goes out, you see who is swimming naked. 00:31:22.460 --> 00:31:26.539 Oh, yeah. Enron in October 2001. WorldCom in 00:31:26.539 --> 00:31:29.039 June 2002, which was the largest bankruptcy ever 00:31:29.039 --> 00:31:32.000 at the time. Adelphia. Executives like Bernard 00:31:32.000 --> 00:31:34.559 Ebers, Jeffrey Skilling, Kenneth Lay, they were 00:31:34.559 --> 00:31:37.299 accused and convicted. It turned out a lot of 00:31:37.299 --> 00:31:39.460 that new economy magic was just old -fashioned 00:31:39.460 --> 00:31:42.650 fraud. But, and this is the crucial but, The 00:31:42.650 --> 00:31:45.490 reason we are doing this deep dive. Not everyone 00:31:45.490 --> 00:31:48.910 died. No. In fact, a surprising number survived. 00:31:49.390 --> 00:31:52.529 48 % of dot -com companies actually survived 00:31:52.529 --> 00:31:55.230 through 2004. They were battered. Their stock 00:31:55.230 --> 00:31:57.390 prices were crushed. But they were still in business. 00:31:57.670 --> 00:32:01.109 Amazon .Ebay. And a little company called Google, 00:32:01.150 --> 00:32:02.930 which actually gained market share during this 00:32:02.930 --> 00:32:06.069 time. The market shifted from fragmentation, 00:32:06.210 --> 00:32:09.490 thousands of little startups, to consolidation. 00:32:10.440 --> 00:32:12.940 a few giants emerged to dominate the landscape. 00:32:13.200 --> 00:32:15.480 And this leads us to the bright side, the theory 00:32:15.480 --> 00:32:17.940 by venture capitalist Fred Wilson. Fred Wilson 00:32:17.940 --> 00:32:20.940 is a legend, and he lost 90 % of his net worth 00:32:20.940 --> 00:32:22.819 in the crash, so he earned the right to have 00:32:22.819 --> 00:32:25.099 an opinion on this. What does he say? He quotes 00:32:25.099 --> 00:32:27.779 a friend who says, nothing important has ever 00:32:27.779 --> 00:32:30.059 been built without irrational exuberance. That 00:32:30.059 --> 00:32:32.450 is a powerful line. Nothing important has ever 00:32:32.450 --> 00:32:34.910 been built without irrational exuberance. It 00:32:34.910 --> 00:32:37.730 really is. The argument is that you need a mania. 00:32:37.730 --> 00:32:40.369 You need investors to go a little crazy to open 00:32:40.369 --> 00:32:43.150 up their pocketbooks wide enough to finance massive 00:32:43.150 --> 00:32:45.009 infrastructure projects. Like the railroads. 00:32:45.250 --> 00:32:48.349 Exactly. In the 1800s, we had a railroad bubble. 00:32:48.750 --> 00:32:51.650 Investors lost everything, but the tracks remained. 00:32:52.049 --> 00:32:54.609 Or the automobile industry. Or in this case, 00:32:54.670 --> 00:32:57.130 the internet backbone. So all that money that 00:32:57.130 --> 00:33:00.700 was lost... The $5 trillion, it didn't just disappear 00:33:00.700 --> 00:33:03.180 into a black hole. No, it went into the ground. 00:33:03.200 --> 00:33:05.539 It went into laying fiber optic cables. It went 00:33:05.539 --> 00:33:08.420 into building server farms. It went into developing 00:33:08.420 --> 00:33:11.220 software and databases. And when the companies 00:33:11.220 --> 00:33:14.059 went bankrupt, that infrastructure didn't disappear. 00:33:14.339 --> 00:33:17.240 The cables stayed in the ground. Exactly. The 00:33:17.240 --> 00:33:19.740 investors lost their shirts, but society kept 00:33:19.740 --> 00:33:22.440 the shirt. We got a high throughput backbone 00:33:22.440 --> 00:33:25.160 for the Internet, essentially for free, paid 00:33:25.160 --> 00:33:27.960 for by the speculative mania of the late 90s. 00:33:27.960 --> 00:33:29.940 That is such a fascinating way to look at it. 00:33:30.000 --> 00:33:32.299 The investors subsidized the modern world. They 00:33:32.299 --> 00:33:34.900 did. The cheap bandwidth we enjoy today, the 00:33:34.900 --> 00:33:38.039 ability to stream video, it's all running on 00:33:38.039 --> 00:33:39.740 the surplus capacity built during the bubble. 00:33:39.819 --> 00:33:41.779 They built the highway, went broke, and we are 00:33:41.779 --> 00:33:44.819 driving on it for free. So as we wrap up, let's 00:33:44.819 --> 00:33:48.220 recap the cycle. We had the hype fueled by new 00:33:48.220 --> 00:33:50.819 tech like Mosaic and easy money from the Fed. 00:33:50.960 --> 00:33:53.000 We had the overinvestment, the get -big -fast 00:33:53.000 --> 00:33:55.960 madness. We had the crash, the pain, the bankruptcies, 00:33:55.960 --> 00:33:58.960 and finally the utility that remained. It's the 00:33:58.960 --> 00:34:01.660 classic boom -and -bust cycle, but accelerated 00:34:01.660 --> 00:34:04.059 to Internet speed. And for you listening, the 00:34:04.059 --> 00:34:06.960 learner, why does this matter today? Because 00:34:06.960 --> 00:34:09.920 human nature doesn't change. We see bubbles forming 00:34:09.920 --> 00:34:12.860 all the time. Look at the see also section of 00:34:12.860 --> 00:34:15.539 our source material. It points to the AI boom 00:34:15.539 --> 00:34:17.360 happening right now. It points to cryptocurrency. 00:34:17.420 --> 00:34:20.360 The patterns are the same. This time is different 00:34:20.360 --> 00:34:23.179 mentality. The fear of missing out. The question 00:34:23.179 --> 00:34:24.760 you should ask yourself when you see these current 00:34:24.760 --> 00:34:28.340 manias is, is this irrational exuberance building 00:34:28.340 --> 00:34:30.900 something useful? Right. Is it just gambling 00:34:30.900 --> 00:34:32.980 or is it funding a railroad? Is it building a 00:34:32.980 --> 00:34:35.639 bridge to nowhere or a fiber optic caber to the 00:34:35.639 --> 00:34:38.519 future? Exactly. Even if the current AI companies 00:34:38.519 --> 00:34:41.480 go bust, will the models and the chips they are 00:34:41.480 --> 00:34:43.980 building change the world? In the case of the 00:34:43.980 --> 00:34:46.559 dot -com bubble, the answer was a resounding 00:34:46.559 --> 00:34:49.219 yes. That is the final provocative thought I 00:34:49.219 --> 00:34:52.260 want to leave you with. Was that $5 trillion 00:34:52.260 --> 00:34:55.980 loss actually a necessary donation to build the 00:34:55.980 --> 00:34:59.019 future? Or was it just pure gambling? I think 00:34:59.019 --> 00:35:01.639 it was a bit of both. But we are the beneficiaries 00:35:01.639 --> 00:35:03.940 of the gamble. We certainly are. Thank you for 00:35:03.940 --> 00:35:06.320 diving deep with us today. It's been a wild ride 00:35:06.320 --> 00:35:08.460 through the late 90s. Always a pleasure. We'll 00:35:08.460 --> 00:35:10.079 see you on the next Deep Dive. Keep learning.