dot.con

John Cassidy’s dot.con is a book which I am conflicted on. On one hand, it does a great job of identifying parallels between the dot com bubble and the crashes of 1927 and 1987. It gives excellent detail on the backstory of several key players and the dynamics they were acting on at the time. There is almost too much detail at times. However, because of when it was written, from late 2002 to early 2003, Cassidy fails to realize the real potential of the internet and how the promises made that played a role in creating the crash did eventually get fulfilled decades later. This flaw corrupts his story but does not completely take away from the insanity he captured leading to the crash.

According to Cassidy, there are four stages of a speculative bubble: Displacement, Boom, Euphoria, and Bust. Displacement is when people expectations of the future change. The Boom is when prices of a stock related to change start to rise, giving early investors high returns and attracting others. Euphoria is the point when common sense is left behind and prices become disconnected from reality. Finally, Bust is when prices plumet and there’s a recession.

Cassidy spends a significant amount of his book setting the scene for the internet. From its initial conception by Vannevar Bush who hypothesized a device called Memex in 1945 that used microphotography and cathode ray tubes, linked together with “trails” that allowed people to navigate a vast collection of information. Computers began to take off in the 60s and in 1969 the ARPANET launched which connected west coast universities via the first version of what would evolve into the internet.

As the internet started to spread and its familiar interface developed with help from trail blazers like Tim Berners-Lee, creating the iconic www format which utilized html, http, and URLs more people began accessing it. The more people that accessed the web, the more valuable it became. The most popular web browser in the early days was Mosaic which was the child of Marc Andreessen. Andreessen was reached out to by Jim Clark and the two of them, with the help of some of the original Mosaic team, made Netscape which took the mantel of most popular browser very quickly.

Andreessen insisted Netscape be completely/near free because internet users expected that to be the case. The business model for internet/technology companies, like Microsoft, was to sell their software cheap to make themselves ubiquitous and then generate revenue off their market share. Market share now = revenue, and hopefully profits, later.

Internet companies were valued differently than traditional companies because there wasn’t a past market to base valuations on. Generally, the number of users was used to justify value. The problem with this is that the acquisition cost of users was often higher than what companies made off users. Without a focus on revenue or cash flow, customer acquisition costs rose as marketing overspent to raise users.

When Netscape did its IPO in 1995, it was valued at $97.2 billion dollars. Around this time, more and more internet companies were doing IPOs because there was a high demand for internet stocks as they were extremely profitable. Traditionally, when a company goes public, it has a history of earnings and some kind of market base that it uses to prove its value. This was not the case for new internet companies who some had less than 2-3 years of earnings and were almost never profitable.

Just when Wall Street was starting to cool down, online retail brought back IPO mania with the promise of internet companies actually producing revenue. Amazon had its IPO in 1997. These companies, while they had revenues, often had losses several times greater than their revenue. To cheerlead these IPOs, networks like CNBC, CNNfn, and Bloomberg were created along with numerous print and, of course, digital media outlets. Some of these digital media outlets even had their own IPOs.

IPOs continue to go in and out of fashion as time progresses and companies are able to generate valuations that go into the billions and might not even have a product produced yet, let alone revenue. Day trading comes into the fold and day trading firms profit on people losing their life savings on trades while pocketing a commission. Trading overall increased dramatically with the new tools making trading accessible over the internet.

College graduates and skilled business professionals opted for startups and .coms over traditional paths increasingly as VCs continued to fund tech firms. All that was needed to get funding at this point was an idea. The fortunes available were too great to risk losing. Investment bankers would rather own the company having the IPO than helping to facilitate it.

On February 2^nd, 2000, the Fed raises rates from 5.5% to 5.75% to correct for expected inflation. This signaled that the Fed was ready to police the market and make the correction that some had been expecting. It wasn’t until April that the crash came. Internet companies’ stocks began to fall dramatically. Many of the companies had P/E ratios in the hundreds or even upwards of a thousand and with no concrete ways of valuing a company, there was no telling where the bottom was. Because of the crash, .com’s were unable to secure additional funding and unprofitable companies started to burn through their runway and go bankrupt. The Gold Rush was over.

When Cassidy begins to draw his final remarks, he dates himself. He claims that regardless of the adoption power that the internet has, it was not the disruptive technology people claimed. In 2003, he didn’t foresee the ubiquity of smartphones, social media, and how the internet would be integrated into every facet of life. He noted how the internet had not killed stockbrokers, print news, or Barnes & Noble. Today, brokers are limited to the wealthy and the majority of people who invest their savings do it themselves. Print news is dead, and Barnes & Noble is fighting with everything it has. In fact, the internet has started a greater trend that has reading in general on the decline. He stated that people still preferred to shop in person, which was true then but not as much now. Online retail has only gotten stronger. Sears, GameStop, JCPenney, and others have fallen to online companies like Amazon. Retailers like Walmart and even places like Chick-fil-a or Chipotle have had to alter their business to accommodate for online shopping. Even if someone is going to a physical location, they might prefer to order their items online. Cassidy completely overlooked the rate at which compute power was increasing and how future internet technology would disrupt everyday life.

Cassidy’s inability to predict the true realization of the information superhighway and a digital world is forgivable. What is less so is his attitude towards Alan Greenspan who he puts through the ringer for overseeing one of the greatest wall street crashes in history. In my likely less informed opinion, Greenspan acted in a timely manner to the bubble. Cassidy himself claims that it can be difficult to identify when a bubble is happening and while it might appear obvious in hindsight, in the moment it might not be. From a 2003 perspective, it would be easy to point at a company like Amazon and say it had a ridiculous valuation. Today, when Amazon and other tech companies dominate the economy and the internet is ubiquitous, the promises of early .com companies don’t seem so absurd. They jumped the gun. Greenspan was already lambasted by the public for raising rates when he did as there was no evidence of inflation. Cassidy also points out that he held off on acting until after Y2K passed. The market failed to react to rate increases initially due to a misguided belief that the New Economy was immune to them, so who is to say what acting earlier would have done. I cast more blame on the SEC for not monitoring the market cheerleaders and analysts who were favoring stocks their company represented. This is where the mania was put into high gear. Perhaps Cassidy naively believed at the time that these firms would receive some kind of reasonable punishment which is why he didn’t go as hard on them as his did on Greenspan but that’s giving him the benefit of the doubt.

One interesting story from this book, which I didn’t see the relevance of, was how IRAs/401(k)s came into the mainstream. In 1974, IRAs were introduced to encourage savings. In 1978 legislators allowed bonuses to be put into IRAs to shield them from taxes. This was clause 401(k). In 1980, when helping redesign a bank’s pension plan, R. Theodore Benna figured to put regular wages in an IRA as well to shield them from taxes since the 401(k) clause didn’t specifically say you couldn’t. This is what made IRAs/401(k)s take off.