What is a Tech Bubble?

The internet bubble (also known as the dot-com bubble or dot bubble) refers to the speculative bubble from 1995 to 2001. In the stock markets of Europe, America, and Asia, the stock prices of technology-related and emerging Internet-related companies rose rapidly.

The hallmark of this period was the formation of a group of Internet companies that mostly failed in their final investments, often referred to as "COM".

year 1994,

Venture Capitalists Witness Internet Companies

A canonical "DOT COM" business model relies on continuous

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According to the theory, the survival of Internet companies depends on expanding their customer base as quickly as possible, even if this will cause huge annual losses. "Grow or lose"

In March 2000,

On January 11, 2000, AOL, a pioneer of dial-up Internet providers, which was favored by TechNet investors, acquired Time Warner, the world's largest media company. Within two years, due to disagreement, the two executives who led the acquisition have left the office. In October 2003, AOL Time Warner changed its name.

The dot-Com company exhausted its funds one by one and was acquired or wound up. The domain name was bought by a former economic rival or domain name investor. Some companies have been charged with dishonest misuse of shareholders' funds,

Macro bubbles have a much shorter duration than commonly thought. The government's rush to intervene could be counterproductive. ^[4]

According to the usual "story", in the second half of the 1990s, the US stock market fell into a frenzy. Under the "irrational prosperity", investors invested a lot of wealth into high-valued high-tech companies, but these speculative companies did not make a little profit and wasted a lot of investment. Therefore, strong government control of the bubble is necessary.

The story is true, but the reality is different. Yes, the US did have a cyber bubble; yes, the bubble caused waste and distortion of investment. But the size of the bubble was not as large as it usually is, and it didn't last that long-in fact, it started in late 1998 and lasted only a year and a half.

Those who agree with the government's measures to lower asset prices believe that the bubble started in 1996-three years before it actually happened. If such a diagnosis is made, the "treatment" will do more harm than the "disease" itself. In fact, when the economic outlook is good, it is difficult for the government and observers to distinguish between irrational prosperity and rational optimism. Therefore, the government should not be tasked with breaking the bubble and suppressing investment.

Of course, there is no doubt that the stock market in the United States ended up with a significant and severe bubble. But when did the bubble start? How big was it?

There is a view that the dot-com bubble in the US stock market should be counted from the IPO of Netscape in March 1995. However, from the end of the Netscape IPO in August 1995, the company has always invested in the Nasdaq Index with an average annual true yield of 9.3%; and held the Netscape stock at the closing price on the listing date until its acquisition by AOL The average annual true rate of return is 35%. Does this look like a bubble?

Another view is that the dot-com bubble should begin before the famous Federal Reserve Chairman Greenspan delivered a famous "irrational prosperity" speech on December 5, 1996. At that time, Greenspan asked in a speech after a banquet in Washington: "How do we know when did irrational prosperity start to raise asset prices improperly?" This remark echoed the world's stock markets. fall. However, the Nasdaq index in 1996 is only 42% of the current value in 2013. If investors have been investing in the Nasdaq index fund since Greenspan s speech, he will have a real return of 8.2% per year rate. Does this seem like irrational prosperity?

It's too early to call January 1998 the starting point of the dotcom bubble. The top ten high-tech companies such as Microsoft and IBM have reasonably said that their stock market value is most likely to be pushed up by "irrational prosperity". But more than half of the ten companies have averaged true annual returns of more than 10% since January 1998. From the perspective of this era, the stock prices of American high-tech companies in January 1998 were not too high, but too low.

Regarding the judgment of the bubble, UC Berkeley postdoc Konstantin Magin and I proposed three criteria.

Our first criterion is: when the true yield of Nasdaq stocks is at the level of 6.5%, it is not considered to be overvalued; the second criterion is if the stock's yield is lower than the true 3% of the bonds The rate of return defines the period of the stock purchase as a "bubble"; the third criterion is that if the subsequent true rate of return is negative, the time of the purchase of the stock can be defined as a "bubble".

According to the second and third criteria, the duration of the dot-com bubble is extremely short. From October 1998 to 2013, the Nasdaq's annual average real return rate fell below 3%; in November 1998, it was negative. According to this, the Nasdaq index was overvalued in less than a year and a half before reaching its peak in March 2000.

If the first criterion is taken, the bubble will last longer. Since April 1997, the Nasdaq has accumulated an average true yield of less than 6.5%. Even so, the bubble only lasted less than three years.

Is it surprising that the dot-com bubble lasted so short? Ma Jin believes it is not. In the macroeconomic sense, significant bubbles are rare and cannot last. Even Galbraith, the economist least convinced of the efficiency of financial markets, said in his study of the stock market crash of 1929 that the period of overvaluation and excessive speculation was short-lived. He pointed out that until the second half of 1928, the state of the US stock market was still quite reasonable.

In fact, the most significant confusion in the U.S. stock market in the macro sense is not that the market is generating bubbles due to irrational prosperity, but why the stock price is always so low that the true return of the stock is so generous-this is the famous " The mystery of equity premium. " It seems that US stock markets are more likely to suffer from excessive caution than irrational prosperity.

It is for this reason that I believe that Greenspan was right when he said that regulating potential overvaluation of asset values was not the responsibility of the government. Of course, if a potential bubble leads to an increase in the risk of a financial crisis, it does need to be monitored. But as long as financial risks are low enough, once the government tries to correct the market out of fear of irrational prosperity, it is likely to do bad things with good intentions.

What is the relationship between these issues and China? I am not sure. But history, especially the history of other countries, although it cannot be copied, can undoubtedly become a country's guide to thinking about problems and a source of lessons.