A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

NASDAQ COMPOSITE STOCK INDEX,
JULY
 1999–
JULY
 2002

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A Broad-Scale High-Tech Bubble
At the bubble’s height, scoffers were as hard to find as the
Maytag repairman. Surveys of investors in early 2000
revealed that expectations of future stock returns ranged from
15 percent per year to 25 percent or higher. For companies
such as Cisco and JDS Uniphase, widely known as producing
“the backbone of the Internet,” 15 percent returns per year
were considered a slam dunk. But Cisco was selling at a
triple-digit multiple of earnings and had a market
capitalization of almost $600 billion. If Cisco grew its
earnings at 15 percent per year, it would still be selling at a
well above average multiple ten years later. And if Cisco
returned 15 percent per year for the next twenty-five years
and the national economy continued to grow at 5 percent over
the same period, Cisco would have been bigger than the entire
economy. Obviously, there was a complete disconnect
between stock-market valuations and any reasonable
expectations of future growth. And even blue-chip Cisco lost
over 90 percent of its market value when the bubble burst and
the forecasted growth never happened. As for JDS Uniphase,

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the following chart plots its prices against the NASDAQ
Index from mid-1997 through mid-2002. By comparison, the
bubble in the overall index is hardly noticeable.
COMPARISON OF JDS UNIPHASE
STOCK 
WITH 
THE 
NASDAQ
COMPOSITE INDEX, JULY
1997–
JULY
2002
In the name game during the tronics boom, all manner of
companies added the suffix “tronics” to increase their
attractiveness; the same happened during the Internet mania.

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Dozens of companies, even those that had little or nothing to
do with the Net, changed their names to include Web-oriented
designations such as dot-com, dotnet, or Internet. Three
researchers from Purdue University, M. Cooper, D.
Dimitrov, and P. R. Rau, studied sixty-three companies that
changed their names in 1998 and 1999 to include some Web
orientation. Measuring the price change of the companies
from five days prior to a name change (when word of the
change began to leak out) to five days after the change was
announced, they confirmed a remarkable effect. Companies
that changed their names enjoyed an increase in price during
that ten-day period that was 125 percent greater than that of
their peers. This price increase occurred even when the
company’s core business had nothing whatsoever to do with
the Net. In the market decline that followed, shares in these
companies became worthless. As the following table shows,
investors suffered punishing losses even in the leading
Internet companies.