For a bit of fun, I asked Claude to look back at what investors were saying during the dot-com boom and, more importantly, what they were saying when the market started falling apart.
There’s quite a lot that sounds familiar.
Back in the late 1990s, investors were convinced the internet was going to change the world. And to be fair, they were right. But that didn’t stop them from making some spectacularly bad investment decisions along the way.
The arguments were remarkably similar to those we’re hearing about AI today.
“This time it’s different.”
Traditional valuation measures were supposedly becoming irrelevant. Forget earnings, forget cash flow and forget conventional price-to-earnings ratios. These were new businesses operating in a new economy. What mattered was growth, users, website traffic and the potential to dominate an enormous market.
Companies didn’t need to make money today because the profits would eventually follow.
“Buy the dip.”
When the Nasdaq started falling after reaching its peak in March 2000, plenty of investors saw it as an opportunity rather than a warning sign.
The first pullback was a buying opportunity. Then came another. And another.
Investors convinced themselves that the technology revolution was too important to fail and that the market would inevitably recover. Some even borrowed money to buy more shares as prices continued falling.
Unfortunately, the dip kept getting deeper.
“You can’t value these companies using traditional methods.”
This was another favourite argument. Investors were encouraged to look beyond profits and focus on future market share, customer numbers and revenue growth.
The theory was that once these businesses reached sufficient scale, profitability would take care of itself.
For some companies, that eventually happened. For many others, it never did.
“The old economy is finished.”
Traditional businesses were increasingly dismissed as yesterday’s investments. The future belonged to internet companies, technology platforms and businesses that could capture enormous markets.
There was a genuine technological revolution taking place, but investors were paying almost any price to get exposure to it.
And here’s the irony.
The bulls were right about the internet. It went on to transform practically every aspect of our lives. Amazon became a giant, online advertising became a multi-billion-dollar industry and e-commerce fundamentally changed retail.
But being right about the technology didn’t necessarily make you right about the stock.
The Nasdaq eventually lost around 77% of its value from its March 2000 peak. It took until 2015 to recover that high.
Think about that for a moment. An investor who bought the Nasdaq at the height of the euphoria had to wait around 15 years just to get back to breakeven, ignoring dividends and inflation.
And that’s perhaps the biggest lesson for today’s AI investors.
AI could be every bit as transformative as the internet. It might even prove to be more important. But that doesn’t mean every company attaching AI to its name deserves a premium valuation, or that today’s market leaders will necessarily remain tomorrow’s winners.
The technology can be revolutionary while the investment turns out to be disastrous.
Perhaps the question isn’t whether AI will change the world. It’s whether investors are paying too much for that future, and whether some of today’s most enthusiastic dip-buyers will eventually discover that the bottom was nowhere near where they thought it was.
Are AI Investors Making the Same Mistakes as the Dot-Com Generation?
The parallels between the dot-com bubble of 1999-2000 and today’s AI boom are quite striking. There are differences, particularly because today’s technology giants are generally far more profitable, but the similarities in investor behaviour are worth noting.
Dot-com bubble vs today’s AI boom
– “This time it’s different.” In 1999, investors argued that the internet had changed the rules of business and traditional valuation metrics no longer applied. Today, we’re hearing similar arguments about AI.
– Valuations don’t matter anymore. Dot-com investors were told to forget traditional P/E ratios and focus on future growth. Today, investors are prepared to pay enormous premiums for companies expected to benefit from AI.
– Buy the dip mentality. When technology stocks started falling in 2000, investors repeatedly bought the dips, convinced the correction was temporary. We’re seeing similar behaviour whenever AI-related stocks sell off today.
– Fear of missing out (FOMO). Investors rushed into internet stocks because nobody wanted to miss the next Amazon or Yahoo. Today, nobody wants to miss the next Nvidia, Palantir or potentially dominant AI company.
– Everyone is jumping on the bandwagon. During the dot-com boom, companies added “.com” to their names to attract investors. Today, almost every major company seems keen to emphasise its AI strategy, sometimes regardless of how much revenue it actually generates from it.
– Massive infrastructure spending. Telecom companies spent fortunes building fibre-optic networks and internet infrastructure in the late 1990s, often on the assumption that demand would grow rapidly. Today, technology giants are committing hundreds of billions of dollars to AI data centres, chips and computing infrastructure.
– Promises of enormous future profits. Dot-com companies justified their valuations by pointing to the huge markets they might eventually dominate. AI companies are doing much the same, with investors pricing in profits that may still be years away.
– The winners will justify the entire sector. Back then, investors assumed that because the internet was revolutionary, internet stocks as a group would do well. Today, there’s a similar assumption that AI’s transformative potential will make most AI-related investments successful. History suggests otherwise.
– Traditional businesses are being written off. During the dot-com era, traditional retailers and established businesses were dismissed as dinosaurs. Today, companies perceived as being slow to adopt AI risk being treated similarly.
– Analysts keep raising price targets. During speculative booms, rising share prices often lead to increasingly optimistic forecasts. The higher stocks go, the more bullish the commentary can become, reinforcing the rally.
– Retail investors arrive late. As the excitement builds, ordinary investors increasingly pile into the most fashionable stocks, often after much of the initial upside has already happened.
– The technology can be right while the investment is wrong. This is perhaps the biggest parallel. The internet genuinely transformed the world, but many dot-com investors lost fortunes. AI could be equally revolutionary without today’s AI valuations necessarily proving justified.
One important difference
Today’s largest AI players – Microsoft, Alphabet, Amazon, Meta and Nvidia – have substantial revenues, established businesses and, in many cases, enormous profits.
That makes today’s situation different from the dot-com era, when many highly valued companies had little revenue and virtually no prospect of near-term profitability.
My biggest concern isn’t that AI is a fad. It’s that investors may be confusing the long-term potential of the technology with the short-term investment returns available at today’s valuations.
The internet changed the world. That didn’t stop the Nasdaq from losing almost 80% of its value.
History doesn’t have to repeat itself, but investors would be foolish to assume it cannot rhyme.
