As soon as I finished my post on lessons from the 2008 recession, I realized it made sense to revisit a few lessons from an earlier recession, the 2000 dot-com crash. Lasting from around 2000 to 2002, it was proceeded by a huge run up in stocks largely fueled by technology companies.
I was 26 when the 2000 dot-com crash began, and was only two years into my 9 to 5 career. I had just started investing at the tail end of a massive stock market bubble. I had the idea of diversification pounded into my skull from a young age, but during the 90’s the idea of diversification seemed to be getting overrun by what Alan Greenspan referred to as “Irrational exuberance”. The prices of tech stocks were soaring which tempted many to flee the safety of diversification and dive into the tech bubble.
I had witnessed the tech bubble of the 90’s mostly as a college student. When I started my career in 1998, the only investments I had were some dividend reinvestment plan (DRIP) stocks and my 401k from work. Yes, in the late 90’s I was actually sending checks of anywhere between $10 and $50 into a DRIP account by snail mail, buying Ford and GTE stock.
Then sometime between late 1999 and early 2000, after barely two years of working for a living, I was finally feeling confident that I had money to invest. It was hard not ot get exitited with the big run up in stocks along with new online platforms making it easier to auto invest. Yes….it was classic FOMO in action.
Dot-Com Lessons Learned
Here is a rundown of my lessons learned from the 2000 recession.
Everyone had advice to give
In his 1989 book “One Up on Wallstreet” Peter Lynch wrote about how stock picking advice ratcheted up during a bull market. Paraphrasing from memory, initially he wrote how you’d get people at dinner parties making an odd recommendation, eventually it would get so bad that the pizza delivery boy would freely offer up his recommendation on the latest hot stock. Peter was right.
Everyone had a list of obscure tech companies they could rattle off. Each one was ‘the next Microsoft’. Interestingly enough, Peter Lynch also wrote to be weary of anyone that claims they found the “next” something….
Action
When the pizza delivery boy freely offers up stock picks, it’s probably time to sell, realize some gains and raise cash.
Risk and Diversification
A girl I dated at the time had a father who was about to retire. He too could rattle off all these tech companies and brag about the money he’d made. He would encourage me to follow his lead and go all in on the tech stocks. I don’t know the dollar amount he lost by late 2000, but it was substantial, in the hundreds of thousands from what I gleaned. He was poised to retire in early 2000, it was sometime around 2010 where I heard he was still in the workforce, retirement put off indefinitely.
Luckily I was young and didn’t have much savings at 26. Per number 3 below, I did dive in and invest in what I thought was a hot stock, and I got burned, but I didn’t go all in like some.
Action
Time horizon and risk tolerance need to be accounted for when making in investment decision. Diversification is simply another way of saying you don’t know timing and magnitude so you spread your money in a manner that places less emphasis on individual stocks or sectors of the economy. Have a clearly stated plan that is tied back to your principles.
Lucent
One of the hottest stocks at the end of that tech boom was Lucent. Why I bought that stock still irks me to this day. It was a dumb move. I bought it in either late 1999 or early 2000 when things were already looking shaky. That investment was nearly wiped out by October 2000. It the worst stock loss I have ever had. What was even worse, I didn’t learn my lesson for a few more years. I continued to invest in stocks. I did much better than the Lucent trade, but not much. It took a few years before I had what I call the big sit down, where I did a deep dive into all of my stock trades up until that time, and realized it was time to go index funds.
Warren Buffett’s rule number 1 (don’t lose money) and rule number 2, don’t forget rule number 1.
Action
It took me longer than I’d care to admit, but eventually I came to terms with the fact that investing in individual stocks was not my game. Investing in index funds has not only made me a lot more money, I can also sleep well at night knowing I’m not taking stupid risks.
Company stock and Enron
Enron didn’t officially go under until the end of 2001. When it did, I recall reading how many employees of Enron had their entire 401k in company stock, and ended up losing it all. It’s pretty basic advice, but it was an eye opening experience at 26 to actually see it happen.
I worked for an employee owned company at the time, and a number of colleagues had a significant amount of their 401k in company stock. Even during the Enron collapse. The mantra at the time was, yeah sure, those guys were a bunch of crooks, that will never happen to us. As it turned out, it took 12 years, but my company fell on hard times. The CEO at the time froze company stock in 401k accounts (similar to Enron) so it could not be sold. You were basically stuck with this investment whether you liked it or not. It took about three years, but the company finally got bought out and those shares went up. However, three years is a long time, and many folks left the company selling their stock at a loss.
Action
Diversify. Going all in on an individual investment is too risky. What I tell my colleagues at work is that you can sip on the company Kool-Aid, but don’t do keg stands with it. I actually made out will when my company got bought out, but I only carried about 10 percent of my 401k in company stock.
Media
Media-wise I followed CNBC and the Motley Fool. The Motley Fool guys had the dominant online platform in personal finance and had books and a radio show as well. They had a catchy way of explaining things, different then all the stuffy news outlets (I stopped following them years ago, whenever I come across them now they appear very clickbaity).
CNBC had a host of colorful personalities pumping stocks and adding fuel to the tech bubble fire.
Media platforms now, as they were back then, are all well and good when you want to know what’s happening in the world, hear about current events. But when it comes to forward predicting, or interpreting, and then turning that interpretation into meaningful action such as buying a certain investment….not so much.
Action
Take in as much current events as needed, but don’t buy the hype.
Looking Back
Buy when others are fearful and sell when everyone is greedy is easier said than done. Perhaps it’s basic human nature, but these things are difficult to do and in my observation most people get them wrong.
In some respects it was good I started investing when I did. Had I begun earlier and been in the market during that steep climb in the ‘90’s, who’s to say I would have fallen prey to the same fate as many other out there, loosing large double digit percentages of my money. Instead I had this short period of time, about 2 years, were I was surrounded by people claiming to be expert stock pickers, only to see those same people get completely hosed. It drove me to read more books and learn more on my own.