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The Dot-Com Bubble and What Still Applies Today
Key takeaways
- The dot-com bubble inflated the NASDAQ fourfold between 1995 and 2000, then came a crash of 78%.
- Companies with no revenue or profit traded at hundreds of times sales — a clear warning signal.
- Many technologies of that era (the internet, e-commerce) ultimately transformed the world — but investors had to wait.
- A low valuation is not a guarantee, and a high valuation is not automatically a bubble — growth is what matters.
- Index investing survived the bubble far better than bets on individual "stars".
The dot-com bubble (1995–2000) showed that even a revolutionary technology can be a lethal investment if you pay too much for it at the wrong time.
How the bubble grew
Following the internet boom in the mid-1990s, investors convinced themselves that any company with a .com domain would change the world. The NASDAQ Composite rose from roughly 750 points in 1995 to 5,132 points in March 2000. Companies like Pets.com or Webvan raised billions of dollars without any profit or realistic business model.
Why the bubble burst
- Valuations lost their connection to reality — the P/S ratio (price-to-sales) at many companies exceeded 100.
- The Federal Reserve raised interest rates in 1999–2000, making capital more expensive.
- Investors realised that the "burn rate" of most startups pointed to bankruptcy within 12 months.
- The NASDAQ lost roughly 78% of its value from peak to October 2002.
What survived and what went under
Amazon, Alphabet (then Google), and eBay survived and became giants. Thousands of other companies vanished without trace. The deciding test was simple: does the company have a path to profit and real revenues? Those who invested in the index rather than individual "internet stars" suffered a loss but did not lose everything.
What the dot-com era still teaches us today
Every technology wave — AI, cloud, biotech — attracts inflated expectations. Valuations can be overheated even in real, functioning companies. Passive index investing will not shield you from a downturn, but it prevents exposure to individual names that fail completely. Risk in technology is systematically underestimated during periods of euphoria.
FAQ
When exactly did the dot-com bubble burst?
The NASDAQ peaked on 10 March 2000 at 5,132 points. The decline that followed lasted until October 2002, during which the index lost roughly 78% of its value.
How do you recognise a market bubble?
Classic signs: companies with no revenues carry enormous valuations, media coverage promises an inevitable rise, retail investors pile in en masse, and detachment from fundamentals is justified by talk of a "new paradigm".
Should I have sold or held on back then?
It depends on your horizon and diversification. The index recovered around 2007. Those who were diversified across the whole market and kept buying regularly recovered sooner than concentrated bets on tech.