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10 March 2003
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NASDAQ Peaked Three Years Ago
Three years ago today, the NASDAQ index closed at its all time high of 5,048.62. Since then, technology investors have lost ridiculously huge amounts of money. Yet few understand what exactly happened and why the index is off 75%, and so are doomed to repeat the mistake of misplaced capital.
Almost all of the real growth in technology firms was based on the very simple fact that the price of microchips fell during the 1990s. Applications that were not economically feasible in 1990 had become so by 1999. Then, the Y2K non-event caused a great many institutions to spend their computer budget for the next couple of years all at once. Increased demand brought higher prices for products, and lower costs for inputs make profits soar -- on paper.
It is a law of nature that scarcity makes people careful with their assets, and abundance makes them profligate. The abundance of wealth generated by technology resulted in greed overtaking fear as the market driver, which brought on the bubble. It is also a law of nature that after a bubble bursts, things never get back to the way they used to be -- ask a Dutch tulip bulb speculator.
So those who wait for recovery in technology stocks probably are looking for the wrong things. They expect a return to three years ago, and that will never happen. Experience has taught that the "new economy" was so much non-sense. One hopes that the next time the NASDAQ clears 5,000 it is because the firm's in the index are worth it -- it would be a first.