Our reputation has been built upon our accuracy. While other research companies may incorporate “expert” opinion and commentary, our discipline relies solely on actual facts, events and anomalies upon which we derive our intelligence. This discipline ensures the change we identify is real rather than simply expected or predicted.
Bubble in the Dot-Com Era
In the 1990s, Silicon Valley participants, many investors and the media believed that dot-com enterprises were creating a “new economy” – that is, a business model based solely on market growth rather than earnings or profits. Fortune’s managing editor said, “The Internet sells better than sex or crime.” The New York Times printed a 70-page special on e-commerce. Everything was exciting...and IPOs only went up.
So many smart people couldn’t be wrong...
Picking Up the Critical Facts
Despite the "new economy" hype, we were noticing some troubling specifics and some critical anomalies.
At the end of the second quarter of 1999, Go2Net, a portal company, reported a $0.07 per share profit, but at the bottom of its report, in small print, the company noted: “[These financial statements] do not purport to be financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP).” By GAAP rules, the company had actually lost $52 million in that quarter.
The proliferation of Web sites was making the Internet increasingly popular but was, at the same time, “putting downward pressure on pricing” for ads, products and services, making it more difficult for those sites to survive without infusions of investor capital.
As we wrote at the time:
“While the user base (i.e., audience) for the Internet [was] expanding, advertising rates [were] declining.”
The stock price for Priceline.com was steadily rising, while its bond price was headed steadily down.
Diagnosing the Change
A very high level of liquidity – not a "new economy" – was enabling investors to keep enterprises of what we called “profitless prosperity” operating. The new economy’s focus on growth, not profits, was risky over time.
Despite such warning signs, NASDAQ and the Internet continued to boom, leading us to infer this: Society was in the middle of a mania. “One important reason to clarify distinctions between fads, crazes and manias,” we wrote in late 1999, “is that the first two fade, while the third typically collapses.”
Inductive Inference: Identifying Areas of Impact
In January 2000, we inferred that “the pinprick of reality” was about to burst “bubble.com.” Indeed, two months later, NASDAQ started its plunge.
We warned of higher and higher levels of investment risk, in turn, putting some sections of the economy at risk (e.g., some retail, chip manufacturers and other industry suppliers, commercial delivery services, some real estate, etc.).