Crypto pundits: “Short-term price doesn’t matter. Just buy & hodl forever!”
If you follow that blindly, you will get rekt.
Not convinced? Look at these shocking lessons from the dot-com bubble👇
1. Yes, the tech was exponential.
The number of internet users grew at a compound rate of over 20% a year since 1995. Now reaching half of world population. Since the 1990s there hasn’t a single year where the growth rate was not positive. Internet was exponential and has changed world, profoundly.
2. But, the market can get way ahead of actual tech adoption.
If you think internet growth was impressive, internet stocks were doubly so. From 1997 to 2000, NASDAQ grew 450%, reaching a top in March, 2000.
It then lost 80% in 2 years, reaching bottom in September 2002, when it was back down to its 1997 level.
3. First-generation internet applications didn’t make it, mostly.
14 dot-com companies spent $3 million each advertising on Super Bowl 2020, a couple months before the crash. Do you recognize any of these names? No? I wonder why 🤔-
– computer.com
– e1040.com
– e-stamp.com
– onMoney.com
– lifeMinders.com
By 2004, over 50% of internet companies that existed pre-crash had gone under. The ones survived mostly became niche websites that make modest cashflows (data from a dot-com survey by Prof. D. Kirsch at U Maryland).
4. Market recovery was a slow grind.
It took NASDAQ 16 years to get back to its all time high of 2000.
Yes NASDAQ has soared in the past decade. But if you bought the index at the height of dot-com bubble, your annual rate of return would be only about 5% from 2000 to 2021, barely beating inflation 😭
Not only that, the rise of NASDAQ in recent decade was mostly helped by second-generation internet companies, new listings after the dot-com crash, e.g. Netflix (2002), Google (2004), Facebook(2012). These wouldn’t have existed in your dot-com portfolio of 2000.
5. Yes, some survivors of do-com bubble did well, eventually.
You can count these with one hand: Apple, Amazon, Ebay, Microsoft.
If you had Amazon as 10% of your portfolio in 2000, you’d have still gained 500% by 2020 even if 1) you bought at the dot-com top, and 2) the rest of your portfolio all went to zero.
But there’s a caveat in that, coming up in a sec.
6. But it’s just as likely that you hodl onto some losers that keep losing even after 20 years.
If you had bought at the dot-com top and your portfolio consisted of Intel, Cisco, MicroStrategy, you’d still be in the red by 2021.
To put things in perspective, MicroStrategy stock had mooned since last year after they turned themselves into a de-facto #bitcoin ETF. But if you were a shareholder from March 2000, after all that you’d still be down by 14% right now. Wow! 🤯
7. Even the winners take a long time to rebound.
You say, “I’m going to hodl the really good projects that I’m sure will survive any crash!”
Ok. If you had bought these eventual winners at the dot-com top, here’s how long it would have taken you to see your portfolio back in green again:
- Ebay: 3 years
- Apple: 5 years
- Amazon: 7 years (actually 9+ years b/c global financial crisis happened right after $AMZN price recovered to previous top)
Imagine patiently hodling $AMZN for 7 years, telling yourself everything’s gonna be fine and the thing will moon eventually. Finally it was showing signs of life…and just when you started to be hopeful…Oops, the GFC came and crashed it again!
You would be right about Amazon eventually. But the first decade after the bubble burst was so demoralizing that few people would have had the conviction to tolerate that much pain.
What can we learn from all this as we invest in a new wave of exponential tech?
1) Even if the underlining tech is growing fast, the price you pay matters. You’ll get rekt if you buy and hodl “at any cost”.
2) If you had some winning survivors in your portfolio, you’d have eventually done ok. But “eventually” can mean a very loooooong time.
3) If you unfortunately bought the top of a local mania, the best thing to do, in hindsight, was to cut your loss quickly.
But in reality this is almost impossible to implement. After all, you didn’t know it was the top. And if you are the type of person who would buy the top, you’d likely be the type to sell at bottom as well.
4) The more realistic thing to do is to make sure you don’t over-pay to begin with.
If you had bought AMZN in 1998, two years before the bubble popped, you’d have incurred no loss even trough the trough after the crash.
Paying a lower price would have given you the margin of safety to comfortably hodl through the great financial crisis as well, without nearly as much psychological stress.
5) You don’t automatically make money just because you rightly predicted the underling tech trend. You still need to a) pick the right investment, and b) maybe more importantly— get in at the right time.
Both are already hard to do for any investment. The fact that there’s a lot of exuberance around an exponential tech makes it even harder.
Looking to invest in DeFi? What are the dos and don’ts to protect your capital and beat the market? Take a look at this thread of DeFi lessons.