The Internet Bubble (also known as the 'Dot-com Bubble' or 'Tech Bubble') was a massive speculative bubble that occurred in the late 1990s. It was characterized by the extreme and rapid rise in the stock market valuations of technology companies, particularly those related to the emerging commercial internet. Fueled by a combination of easy money, media hype, and a widespread belief in a “New Economy,” investors poured capital into any company with a “.com” in its name. Many of these dot-com companies had no profits, no solid business plan, and sometimes not even a finished product. Traditional valuation metrics were cast aside in favor of new, often meaningless measures like “website traffic” or “eyeballs.” The bubble reached its peak in March 2000, after which it spectacularly burst, leading to a devastating bear market that wiped out trillions of dollars in market value and pushed many once-hyped companies into bankruptcy.
The Dot-com Bubble wasn't caused by a single event but by a perfect storm of factors that created an environment of unchecked optimism and speculation.
The core driver was a powerful story: the internet was changing everything. Proponents argued that the old rules of business and finance no longer applied. This “New Economy” thesis suggested that internet companies could grow infinitely without ever needing to show a profit. As a result, analysts and investors abandoned time-tested valuation tools like the P/E ratio and discounted cash flow analysis. Instead, they focused on growth potential, however vague. This narrative convinced millions that getting in on the ground floor of the next Microsoft was a once-in-a-lifetime opportunity, creating a frenzied rush to buy tech stocks at any price.
This speculative fire was doused with gasoline in the form of massive capital inflows.
Like all bubbles built on hype rather than value, the Internet Bubble was destined to burst. The party ended abruptly in 2000.
In hindsight, the signs were obvious. By late 1999, the NASDAQ Composite Index was soaring, but many underlying companies were burning through cash at an alarming rate with no path to profitability. Some value-oriented investors, most notably Warren Buffett, publicly warned that the sector was overvalued and largely stayed on the sidelines, facing criticism for being “out of touch.” Even a 1996 speech by then-Federal Reserve Chairman Alan Greenspan, which cautioned against the market's “irrational exuberance,” failed to cool the speculation for long.
The tipping point came in March 2000. A few major tech companies missed earnings estimates, and a ruling against Microsoft in an antitrust case sent ripples of fear through the market. Confidence evaporated, and the herd mentality that drove prices up now sent them into a freefall. Panicked selling began, triggering margin calls and forcing even more selling. Over the next two years, the NASDAQ index fell by nearly 80% from its peak. Trillions of dollars of wealth vanished. Famous dot-com flameouts like Pets.com, Webvan, and eToys became cautionary tales. It's important to remember that even high-quality, durable tech companies were punished severely. Shares in Amazon, which survived and later thrived, fell by over 90%. Cisco, a profitable networking giant, saw its stock drop by more than 80%. The crash demonstrated that in a panic, the market sells indiscriminately.
The Dot-com Bubble is a powerful case study for value investing. It highlights timeless principles that can protect investors from the madness of crowds.