Sometimes I feel like I have already missed all the great investment opportunities but careful analysis of history suggests otherwise. Peter Theil, co-founder of Paypal, provides us with a brief history of the 1990s where we witnessed several asset bubbles bursting: the East Asian financial crisis, the Russian ruble crisis, the Long-Term Capital Management crisis, and the eventual tech bubble. Prudent investors can make money during the formation of an asset bubble (by going long) and when the bubble bursts (by going short). Add to this the numerous other asset bubbles we’ve seen since the tech bubble (primarily real-estate related) and it is easy to convince yourself that there should be no shortage of great investment opportunities in the future.
Most of the 1990s was not the dot com bubble. Really, what might be called the mania started in September 1998 and lasted just 18 months. The rest of the decade was a messier, somewhat chaotic picture.
The 1990s could be said to have started in November of ’89. The Berlin Wall came down. 2 months of pretty big euphoria followed. But it didn’t last long. By early 1990, the U.S. found itself in a recession—the first one in post WWII history that was long and drawn out. Though it wasn’t a terribly deep recession—it technically ended in March of ’91—recovery was relatively slow. Manufacturing never fully rebounded. And even the shift to the service economy was protracted.
So from 1992 through the end of 1994, it still felt like the U.S. was mired in recession. Culturally, Nirvana, grunge, and heroin reflected increasingly acute senses of hopelessness and lack of faith in progress. Worry about NAFTA and U.S. competitiveness vis-à-vis China and Mexico became near ubiquitous. The strong pessimistic undercurrent fueled Ross Perot’s relatively successful third party presidential candidacy. George H.W. Bush became the only 1-term President in the last thirty years. Things didn’t seem to be going right at all.
To be sure, technological development was going on in Silicon Valley. But it wasn’t that prominent. Unlike today, the Stanford campus in the late 1980s felt quite disconnected with whatever tech was happening in the valley. At that time, Japan seemed to be winning the war on the semiconductor. The Internet had yet to take off. Focusing on tech was idiosyncratic. The industry felt small.
The Internet would change all that. Netscape, with its server-client model, is probably the company most responsible for starting the Internet. It was not the first group to think of a 2-way communications network between all computers; that honor goes to Xanadu, who developed that model in 1963. Xanadu’s problem was that you needed everyone to adopt it at once for the network to work. They didn’t, so it didn’t. But it became a strange cult-like entity; despite never making any money, it kept attracting venture funding for something like 29 years, finally dying in 1992 when investors became irreversibly jaded.
So Netscape comes along in ’93 and things start to take off. It was Netscape’s IPO in August of 1995—over halfway through the decade!—that really made the larger public aware of the Internet. It was an unusual IPO because Netscape wasn’t profitable at the time. They priced it at $14/share. Then they doubled it. On the first day of trading the share price doubled again. Within 5 months, Netscape stock was trading at $160/share—completely unprecedented growth for a non-profitable company.
The Netscape arc was reminiscent of Greek tragedy: a visionary founder, great vision, hubris, and an epic fall. An instance of Netscape’s hubris had them traveling to the Redmond campus, triumphantly plastering Netscape posters everywhere. They poked the dragon in the eye; Bill Gates promptly ordered everyone at Microsoft to drop what they were doing and start working on the Internet. IE came out shortly after that and Netscape began rapidly losing market share. Netscape’s saving grace was its legally valuable antitrust claims—probably the only reason that a company that never really made money was able to sell to AOL for over a billion dollars.
The first three years after Netscape’s IPO were relatively quiet; by late 1998, the NASDAQ was at about 1400—just 400 points higher than it was in August ’95. Yahoo went public in ’96 at a $350M valuation, and Amazon followed in ’97 at a $460M valuation. Skepticism abounded. People kept looking at earnings and revenues multiples and saying that these companies couldn’t be that valuable, that they could never succeed.
This pessimism was probably appropriate, but misplaced. Things weren’t going particularly well in the rest of the world. Alan Greenspan delivered his famous irrational exuberance speech was 1996—a full 3 years before the bubble actually hit and things got really crazy. But even if there was irrational exuberance in 1996, the U.S. was hardly in a position to do anything about it. 1997 saw the eruption of the East Asian financial crises in which some combination of crony capitalism and massive debt brought the Thai, Indonesian, South Korean, and Taiwanese (to name just a few) economies to their knees. China managed to avoid the brunt of the damage with tight capital controls. But then in 1998, the Ruble crisis hit Russia. These were unique animals in that usually, either banks go bust or your currency goes worthless. Here, we saw both. So your money was worthless, and the banks had none of it. Zero times zero is zero.
On the heels of the Russian crisis came the Long-Term Capital Management crisis; LCTM traded with enormous leverage (“picking up nickels in front of a bulldozer”), ultimately blew up, and but for a multibillion dollar bailout from the Fed, seemed poised to take down the entire U.S. economy with it. Things in Europe weren’t all that much better. The Euro launched in January 1999, but optimism about it was the exception, strong skepticism the norm. It proceeded to lose value immediately.
One way to think about the tech mania from March 1998 to September 2000, then, comes from this insight that pretty much everything else was going insanely wrong before that time. The technology bubble was an indirect proof; the old economy was proven not to work, as we could no longer compete with Mexico or China. Emerging markets were proven failures, rife with cronyism and mismanagement. Europe offered little hope. And no one wanted to invest with leverage after the LTCM disaster. So, by the late ‘90s, a process of elimination left only one good place to put money: in tech.