/ 23 March 2005

Looking back with regret

It was five years ago this week that the party finally staggered to an end. With one last sip of the heady brew that had sent stocks ever higher over the preceding five years, the United States Nasdaq index peaked at 5 048,62.

By March 2000, the Nasdaq had eclipsed the traditional measure of valuations on Wall Street — the Dow Jones industrial average.

Alan Greenspan, chairperson of the Federal Reserve, had warned against ”irrational exuberance” in 1996. He believed in the transformative power of new technology, but said there was a risk of investors getting carried away.

Ultimately, share values have to be based on profits or dividends. By early 2000, the price of new economy stock hugely exceeded any likely earnings and Wall Street was as overvalued as at any time in its history.

Investors were told there was unlimited money to be made out of the dotcom revolution — and that was true, until the point where there were no longer more buyers than sellers. The market reached that point in March 2000 and, since then, the Nasdaq has lost 60% of its value and millions of small investors have suffered.

In retrospect, there were signs of trouble brewing. The Federal Reserve, for instance, had been prompted into action by the scale of the boom, keeping rates artificially low in 1999 because of fears of the Y2K bug, but adopting a more aggressive line once it was clear that fears of a meltdown had been exaggerated. Borrowing costs went up by a percentage point between February and May 2000.

A second straw in the wind was the biggest merger to date, between America Online (AOL) and Time Warner. In reality, AOL cashed in on its sky-high valuation before the crash. It was never worth the $350-billion when the deal was announced and the merged entity now has a valuation of $80-billion.

In Britain, Freeserve, Baltimore Technologies and Psion were elevated to the FTSE 100 in March 2000.

In the US, the trigger for the crash was thought to be an article headlined ”Burning Up” in investment journal Barron’s, which raised the possibility that at least 50 quoted technology companies could run out of money before the year was out. The article coincided with one of the best-timed book launches in history: the release of Irrational

Exuberance by economist Robert Shiller, exposing the shaky underpinnings of Wall Street.

It was in Internet chatrooms that the frenzy was at its worst — more than 200 000 small investors rushed to buy shares in Lastminute. On March 14 2000, the 19-month-old firm came to the market at almost £4. On the first day of trading, it soared to almost £5, producing a value of more than £800-million when its revenues were only £1,5-million a year.

But within a fortnight, those shares fell below their issue price — and carried on plunging to below 50p by 2002.

Some investors burned in the boom are now buying into commodities, oil and resource stocks. When one bubble pops, it’s never too long before the next one blows up. — Â