The tulip, NASDAQ, and the dot-com crash

I’m studying the dot-com crash for the book… (the image is the Pets.com sock puppet)
From 1634-1637 a wave of enthusiasm and investment swept the Dutch Republic, the object of which was the tulip. At home, the tulip was becoming an important element of Turkish court culture, to the extent that the Sultan of the Ottoman Empire appointed a Chief Florist to his court. By the time tulip bulbs had made the long and expensive journey from Constantinople to Harlem they were more than simply a decoration or gardener’s diversion. The tulip gave off a whiff of the exotic East, and it became the collector’s item of the Dutch urbane. Extraordinary Popular Delusions And The Madness Of Crowds, a book written in the 1840s and probably not entirely accurate, depicts a pervading mania:

In 1634, the rage among the Dutch to possess [tulips] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade. As the mania increased, prices augmented, until, in the year 1635, many persons were known to invest a fortune of 100,000 florins in the purchase of forty roots.

Perhaps it is not surprising that the tulip mania was conjured up three and a half centuries later in comparison with the dot com bubble.

According to the same account, which may in this reference be further yet from accuracy, a single bulb of the rare Sempre Augustus species of tulip was traded for enormous quantities of mixed goods including two lasts of wheat (a last equals approximately 4,000 lbs), four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine (approximately 100 gallons), four tuns of beer (a tun is over 200 gallons), two tuns of butter, one thousand Ibs. of cheese, a complete bed, a suit of clothes, a silver drinking-cup. Another trade for a single bulb of the rare Viceroy species, according to the same account, was 12 acres of building land.

Apocryphal or not these tall tales and the boom and bust that is known to have occurred from 1634-1637 resonate with the 1996-2000 dot-com bubble. The Dow Jones database of news articles returned 433 articles mentioning “tulipmania” or “tulip mania” since the beginning of 1999 to mid 2001. In March 2000 as the dot-com stocks began to look increasingly vulnerable, Ron Baron, a prominent money manager, apparently made the tulip connection and circulated copies of Extraordinary Popular Delusions And The Madness Of Crowds among his employees

None of this was evident in the mid 1990s. Optimism ran rampant. In 1995 Fortune told business readers ‘finally here’s something about the Net to pique your interest. Real money. Real fast’. The most famous Silicon Valley venture capitalist, John Doerr, spoke of ‘the single greatest legal creation of wealth in the history of the planet’. The July 1997 cover of Wired announced that the combination of technological advance and commercial opportunity had started a revolution.

‘We are watching the beginnings of a global economic boom on a scale never experienced before. We have entered a period of sustained growth that could eventually double the world’s economy every dozen years and bring increasing prosperity for – quite literally – billions of people on the planet. We are riding the early waves of a 25-year run of a greatly expanding economy that will do much to solve seemingly intractable problems like poverty and to ease tensions throughout the world’.

At the end of 1996, a year after the spectacular Netscape initial public offering (IPO) had signaled the dot-com boom, the NASDAQ index was at just over 1291. In July 1998, the index had climbed to 2000 points.

On 12 September 1999 VA Linux Systems made its IPO selling shares at $30 per share. By the close of business that day, the value of the company’s shares had ‘popped’ to $239.25 a share. This was a one day jump of 698%. With the clamor for shares from IPOs in dot com companies creating such inflated valuations, the Nasdaq climbed ever higher. On 11 March 1999, the index surpassed the 3000 point mark, and rose above the 4000 point mark on 29 December of the same year. All conventions governing business, growth, and investment seemed to have been turned on their heads.

In 2000, Cisco Systems, a company that builds networks and networking equipment, had jumped six hundred and eighty nine places since 1990 to become No. 3 (behind only General Electric and Exxon) in the ranking of US companies by market value. On 10 March 2000 NASDAQ finally peaked at a value of over 500 per cent its value on the day of the Netscape IPO five years previously. It had risen 75 per cent in the preceding four and a half months.

The collapse, when it came, was rapid. In 2001 the bull market pivoted, and a bear market took over. By March 2001 NASDAQ had collapsed from its 5000 peak to 2000 points. In October 2002, the value of the Nasdaq had fallen to $1.6 trillion, a quarter of its March 2000 value of $6.7 trillion. Not only were fragile dot com new arrivals failing, but large established firms such as Cisco, Intel, and AOL announced big layoffs. Only nine months after Nasdaq’s all time peak in March 2000, CNN reported that the Internet stocks in the Bloomberg Internet Index had lost $1.755 trillion from their peak values. It dubbed the dot com collapse ‘the $1.7 trillion dot com investing lesson’. The outlook looked bleak.

At the beginning of 2000 Kevin Kelly lamented in an op-ed in the Wall Street Journal that:

‘Three trillion dollars lost on Nasdaq, 500 failed dot-coms, and half a million hi-tech jobs gone. … The hundreds of ways in which the Internet would “change everything” appear to have melted away’.

What happened, and why, having experienced this, might any sensible person in 2001 be optimistic for the future? More anon…