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

THE 
JAPANESE 
STOCK-MARKET
BUBBLE JAPANESE STOCK PRICES
RELATIVE TO BOOK VALUES
, 1980–
2000

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Source: Morgan Stanley Research
and author’s estimates.

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4

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THE EXPLOSIVE
BUBBLES OF THE EARLY
2000s
If you can keep your head when all about you are losing
theirs…
Yours is the Earth and everything that’s in it…
—Rudyard Kipling, 
If
—
F
INANCIALLY DEVASTATING AS
the
bubbles of the last decades of the twentieth century were,
they cannot compare with those of the first decade of the
twenty-first century. When the Internet bubble popped in
the early 2000s, over $8 trillion of market value evaporated.

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It was as if a year’s output of the economies of Germany,
France, England, Italy, Spain, Holland, and Russia had
completely disappeared. The entire world economy almost
crashed when the U.S. real estate bubble popped and its
associated mortgage-backed securities plunged in value.
Comparing either of these bubbles to the tulip-bulb craze is
undoubtedly unfair to the flowers.
THE INTERNET BUBBLE
Most bubbles have been associated with some new
technology (as in the tronics and biotech booms) or with
some new business opportunity (as when the opening of
profitable new trade opportunities spawned the South Sea
Bubble). The Internet was associated with both: it
represented a new technology, and it offered new business
opportunities that promised to revolutionize the way we
obtain information and purchase goods and services. The
promise of the Internet spawned the largest creation and
largest destruction of stock market wealth of all time.
Robert Shiller, in his book 
Irrational Exuberance
,
describes bubbles in terms of “positive feedback loops.” A

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bubble starts when any group of stocks, in this case those
associated with the excitement of the Internet, begin to rise.
The updraft encourages more people to buy the stocks,
which causes more TV and print coverage, which causes even
more people to buy, which creates big profits for early
Internet stockholders. The successful investors tell you at
cocktail parties how easy it is to get rich, which causes the
stocks to rise further, which pulls in larger and larger groups
of investors. But the whole mechanism is a kind of Ponzi
scheme where more and more credulous investors must be
found to buy the stock from the earlier investors. Eventually,
one runs out of greater fools.
Even highly respected Wall Street firms joined in the hot-
air float. The venerable investment firm Goldman Sachs
argued in mid-2000 that the cash burned by the dot-com
companies was primarily an “investor sentiment” issue and
not a “long-term risk” for the sector or “space,” as it was
often called. A few months later, hundreds of Internet
companies were bankrupt, proving that the Goldman report
was inadvertently correct. The cash burn rate was not a long-
term risk—it was a short-term risk.
Until that moment, anyone scoffing at the potential for the

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“New Economy” was a hopeless Luddite. As the chart
NASDAQ Composite Stock Index, July 1999–July 2002
indicates, the NASDAQ Index, an index essentially
representing high-tech New Economy companies, more than
tripled from late 1998 to March 2000. The price-earnings
multiples of the stocks in the index that had earnings soared
to over 100.