The Dot-com Bubble (also known as the 'dot-com boom', 'tech bubble', or 'internet bubble') was a historic speculative bubble and subsequent crash that occurred roughly between 1997 and 2001. The period was characterized by a frenzied and irrational surge in the equity market valuations of technology companies, particularly those with an internet-focused business model—the so-called “dot-coms.” Investors, swept up in the belief that the internet represented a “New Economy,” abandoned traditional valuation metrics. Companies with little more than a business plan and a '.com' in their name could raise millions through venture capital funding and IPOs. The excitement was fueled by a belief that profits and revenue were old-fashioned concepts; what mattered were “eyeballs,” website traffic, and market share, with the assumption that profits would magically appear later. This euphoria drove the tech-heavy Nasdaq Composite index to astronomical highs before the bubble spectacularly burst, wiping out trillions of dollars in market value and teaching investors a brutal, timeless lesson.
The dot-com mania wasn't born in a vacuum. It was a perfect storm of technological revolution, easy money, and classic human psychology. Understanding its drivers is key to spotting the warning signs of future bubbles.
The central pillar of the bubble was a compelling story: the internet was changing everything. Proponents argued that this technological shift was so profound that old rules of business and valuation no longer applied. Why worry about a P/E ratio when you're building the future? This narrative was intoxicating.
A flood of capital poured into the tech sector, and the media fanned the flames, creating a powerful feedback loop.
The market for IPOs became a public spectacle. A company could go public with a flimsy business model and see its stock price double, triple, or more on the first day of trading. This created a casino-like atmosphere where investors weren't buying a piece of a business but rather a lottery ticket, hoping for a quick “pop.” Infamous companies like Pets.com, which raised $82.5 million in its IPO only to liquidate less than a year later, became symbols of this excess.
Like all bubbles built on euphoria rather than fundamentals, the dot-com bubble was destined to burst. For followers of value investing, its collapse was not a surprise but a powerful affirmation of timeless principles.
The party ended abruptly in March 2000. A few catalysts, including rising interest rates and a handful of major tech companies missing earnings forecasts, pricked the bubble. Confidence evaporated, and the panicked selling began. The Nasdaq Composite, which had peaked above 5,000, collapsed by nearly 80% over the next two years. Hundreds of dot-com companies went bankrupt, taking investors' money with them. The survivors, like Amazon and Cisco, saw their stock prices decimated, taking years to recover.
The ashes of the dot-com bubble provide some of the most important lessons an investor can learn.