EDIT: thanks for all these brilliant responses. Hits great to get the various perspectives. Upvotes are on me!
In: 13
It was mostly “fad investing”. Computers were the “in thing” and people were investing heavily in companies involved in tech.
Supply and demand tells us that when you have more buyers than sellers prices go up. People seemed to think prices would keep going up, kept investing and the companies became significantly overvalued as a result.
There was always going to be a correction but when the events of 11th September 2001 occurred, markets across the world collapsed and these overpriced shares dropped rapidly; ultimately the companies that survived found themselves with more realistic share prices.
It was mostly “fad investing”. Computers were the “in thing” and people were investing heavily in companies involved in tech.
Supply and demand tells us that when you have more buyers than sellers prices go up. People seemed to think prices would keep going up, kept investing and the companies became significantly overvalued as a result.
There was always going to be a correction but when the events of 11th September 2001 occurred, markets across the world collapsed and these overpriced shares dropped rapidly; ultimately the companies that survived found themselves with more realistic share prices.
So, Wall Street Investors aren’t like, mathematicians. They do produce some documentation on what businesses currently make, and their performance in the past, but a lot of it is gut instincts and what insiders call ‘animal spirits’, which refers to the general mood of the Wall Street subculture. Basically, the moods of the wealthy and what’s trending in their community have a much greater impact on stock prices than the actual performance of the companies that people are invested in. If they think the price of a stock will go up, they’ll buy it, and that *causes* the price to go up. When they think it’s going to go down, they sell it, and that *causes* it to go down.
One of the ways this manifests is what they call ‘speculative bubbles’. Essentially, investors get an idea in their head, like how half the internet was super into hyperloops for a while. The *idea* that something will be really profitable spreads, and *everyone* invests into it. A company that really only needed like $20m to really set up their business model and saturate the market gets $500m in investment, driving the stock price up and up.
Now, the smart people on Wall Street know when something is a bubble. But, like a ponzi scheme, they know that the price will keep going up until the day it crashes. So, they keep buying, planning to sell later – exactly like Bitcoin trading blew up in everyone’s faces. Once the crash starts, the insiders are the first to hear about it, and sell before the price has totally bottomed out.
Back in the 90s, people were starting to get the idea how big the internet was, but at that time there was a few good investments and a lot of bad ones. One of these bubbles formed – people massively overinvested in tech stocks, and because of that overinvestment, the price kept going up.
Once the momentum stalled, the insiders all figured the price had hit its peak and sold, precipitating a price drop. They made a fortune, and then for everyone else, *how much* they lost was a question of how quickly they could get a sell order in.
These types of speculative bubbles are part of the boom and bust cycle of investor economies. It’s intrinsic to how the stock market operates. It happens with just about every new technology and social development. Others in the thread will probably point to specific dumb tech company investments, just like while real estate was trending in 08 people could point to specific dumb mortgages. But those companies get investments because of the way that ideas spread, and how trendy investments see little scrutiny.
So, Wall Street Investors aren’t like, mathematicians. They do produce some documentation on what businesses currently make, and their performance in the past, but a lot of it is gut instincts and what insiders call ‘animal spirits’, which refers to the general mood of the Wall Street subculture. Basically, the moods of the wealthy and what’s trending in their community have a much greater impact on stock prices than the actual performance of the companies that people are invested in. If they think the price of a stock will go up, they’ll buy it, and that *causes* the price to go up. When they think it’s going to go down, they sell it, and that *causes* it to go down.
One of the ways this manifests is what they call ‘speculative bubbles’. Essentially, investors get an idea in their head, like how half the internet was super into hyperloops for a while. The *idea* that something will be really profitable spreads, and *everyone* invests into it. A company that really only needed like $20m to really set up their business model and saturate the market gets $500m in investment, driving the stock price up and up.
Now, the smart people on Wall Street know when something is a bubble. But, like a ponzi scheme, they know that the price will keep going up until the day it crashes. So, they keep buying, planning to sell later – exactly like Bitcoin trading blew up in everyone’s faces. Once the crash starts, the insiders are the first to hear about it, and sell before the price has totally bottomed out.
Back in the 90s, people were starting to get the idea how big the internet was, but at that time there was a few good investments and a lot of bad ones. One of these bubbles formed – people massively overinvested in tech stocks, and because of that overinvestment, the price kept going up.
Once the momentum stalled, the insiders all figured the price had hit its peak and sold, precipitating a price drop. They made a fortune, and then for everyone else, *how much* they lost was a question of how quickly they could get a sell order in.
These types of speculative bubbles are part of the boom and bust cycle of investor economies. It’s intrinsic to how the stock market operates. It happens with just about every new technology and social development. Others in the thread will probably point to specific dumb tech company investments, just like while real estate was trending in 08 people could point to specific dumb mortgages. But those companies get investments because of the way that ideas spread, and how trendy investments see little scrutiny.
A lot of people are talking about all of the websites that failed for all kinds of various reasons, and yes, that started the dominoes falling, but the actual burst came as a result of that. Far more than just a ton of b2c (business to consumer, meaning the business sells straight to consumer) e-commerce websites and other sites that sprang up and failed, there were lots of b2b (business to business, meaning they sold software and services to businesses to help them sell to consumers) startups who had solid business models and real products that worked, which failed because many of their customers started to go away.
I myself worked for one of these. I worked for a rapidly growing startup that provided payment processing for those e-commerce sites. This was before PayPal existed, and at that time, for the most part, if a website wanted to sell something, they had to figure out how to do all of the credit card processing themselves. We were profitable, and on the path to IPO, and then all those companies started to fail, so we lost a lot of our customer base, and we failed.
There were other companies that started doing things like web hosting for those sites, other companies which provided assistance for the supply chain management, other companies for managing shipping, etc, etc. The dot com boom was a lot more than just websites selling stuff direct to consumers. It created all kinds of companies to support selling stuff direct to consumers. When those companies lost their customers, they also failed. THAT was the real bubble bursting.
A lot of people are talking about all of the websites that failed for all kinds of various reasons, and yes, that started the dominoes falling, but the actual burst came as a result of that. Far more than just a ton of b2c (business to consumer, meaning the business sells straight to consumer) e-commerce websites and other sites that sprang up and failed, there were lots of b2b (business to business, meaning they sold software and services to businesses to help them sell to consumers) startups who had solid business models and real products that worked, which failed because many of their customers started to go away.
I myself worked for one of these. I worked for a rapidly growing startup that provided payment processing for those e-commerce sites. This was before PayPal existed, and at that time, for the most part, if a website wanted to sell something, they had to figure out how to do all of the credit card processing themselves. We were profitable, and on the path to IPO, and then all those companies started to fail, so we lost a lot of our customer base, and we failed.
There were other companies that started doing things like web hosting for those sites, other companies which provided assistance for the supply chain management, other companies for managing shipping, etc, etc. The dot com boom was a lot more than just websites selling stuff direct to consumers. It created all kinds of companies to support selling stuff direct to consumers. When those companies lost their customers, they also failed. THAT was the real bubble bursting.
In the late 90s the ‘practical internet’ was born.
While the internet had existed for decades it had only really been used by enthusiasts, big corporations, the military, and academics.
The late 90s saw a boom of internet growth where it became something used in the average household. Email, online shopping, and web surfing became more and more common place.
Lots of startups during this time were trying to get in on the boom but for every Amazon or Ebay there was a dozen pets.com that either had a flawed business model or a business that just wouldn’t work.
A lot of internet businesses like Amazon are actually just the modern version of buying from a mail order catalogue and when people realized that the shipping costs didn’t make up for the convenience of buying from home companies like pets.com collapsed.
Seeing that the internet was a huge untapped marketplace investment money rolled in and a lot of web companies ballooned in size while not generating any significant revenue.
These businesses had stock prices that were way over valued and wall street speculation was rampant.
Eventually the bubble popped and many of these early internet businesses went into bankruptcy. Lots of investment cash disappeared and the stock market took a tumble.
One the prevailing theories is that the market greatly over estimated the speed at which the internet was growing. These businesses might have actually succeeded today but back then the internet didn’t have nearly as many users as now.
The other point is that Amazon succeeded in part because it was able to build on its low-shipping cost book business to put together a massive shipping infrastructure to lower the cost of shipping for every day items.
…That and because it ran at a loss for a long time to put the small book stores that it competed with out of business.
In the late 90s the ‘practical internet’ was born.
While the internet had existed for decades it had only really been used by enthusiasts, big corporations, the military, and academics.
The late 90s saw a boom of internet growth where it became something used in the average household. Email, online shopping, and web surfing became more and more common place.
Lots of startups during this time were trying to get in on the boom but for every Amazon or Ebay there was a dozen pets.com that either had a flawed business model or a business that just wouldn’t work.
A lot of internet businesses like Amazon are actually just the modern version of buying from a mail order catalogue and when people realized that the shipping costs didn’t make up for the convenience of buying from home companies like pets.com collapsed.
Seeing that the internet was a huge untapped marketplace investment money rolled in and a lot of web companies ballooned in size while not generating any significant revenue.
These businesses had stock prices that were way over valued and wall street speculation was rampant.
Eventually the bubble popped and many of these early internet businesses went into bankruptcy. Lots of investment cash disappeared and the stock market took a tumble.
One the prevailing theories is that the market greatly over estimated the speed at which the internet was growing. These businesses might have actually succeeded today but back then the internet didn’t have nearly as many users as now.
The other point is that Amazon succeeded in part because it was able to build on its low-shipping cost book business to put together a massive shipping infrastructure to lower the cost of shipping for every day items.
…That and because it ran at a loss for a long time to put the small book stores that it competed with out of business.
You know how people say if only i put X amount of money in amazon back then. The problem is that there were 1000s of little amazon back then and you dont know which one will win. Basically the internet was seen as a gamechanger to everyday life (which i would agree with) and thousands companies were given tremendous capital. When the dust settled there were 3 major players left. This is nothing unusual, it happens all the time.
You know how people say if only i put X amount of money in amazon back then. The problem is that there were 1000s of little amazon back then and you dont know which one will win. Basically the internet was seen as a gamechanger to everyday life (which i would agree with) and thousands companies were given tremendous capital. When the dust settled there were 3 major players left. This is nothing unusual, it happens all the time.
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