The Rewind: bubble.com

Episode Summary

Executive Summary: Howard Marks revisits his 2000 memo Bubble.com, explaining how observations from the South Sea Bubble and other manias led him to warn that dot-com and tech stocks were being driven by irrational optimism, FOMO, and lottery-ticket thinking. He contrasts then-vulnerable internet companies with today’s stronger tech leaders, but argues the bubble logic—"no price too high"—remains the key danger when enthusiasm outruns fundamentals.

Main Topics: Origins of the Bubble.com memo (Priority: 5/5): Marks explains that reading Edward Chancellor’s Devil Take the Hindmost and seeing historical parallels with the South Sea Bubble prompted him to write the memo, after months of research over the 1999 holiday season. Historical parallels to the South Sea Bubble (Priority: 5/5): The memo compares 2000-era tech mania to the 1720 South Sea Bubble, emphasizing speculation, circular valuation logic, greater-fool behavior, and investors abandoning normal work to chase hot stocks. Bubble psychology and valuation errors (Priority: 5/5): Marks argues bubbles are fueled by excessive optimism, disbelief suspension, and the idea that a good story justifies any price; he says the hallmark of a bubble is the belief that there is 'no price too high.' Modern tech vs. dot-com era distinctions (Priority: 4/5): He distinguishes today’s established, profitable giants like Amazon and Microsoft from the earlier internet bubble, but says strong businesses can still become overpriced if optimism becomes excessive. Venture capital and IPO mania (Priority: 5/5): Marks critiques surging VC fundraising and IPO enthusiasm, arguing that abundant capital, weak discipline, and the expectation of quick flips can compress returns and distort incentives. Profitability, competition, and business-model risk (Priority: 5/5): He questions whether many internet firms can monetize, sustain practical operating models, or defend margins once incumbents respond and price competition intensifies. Valuation and the fear of missing out (Priority: 5/5): Marks warns that extreme relative performance and huge first-day IPO gains create powerful FOMO, making investors overlook fundamentals and chase conceptual upside instead of reasonable returns.

Key Arguments: Historical financial manias recur because human behavior is constant: greed, envy, FOMO, and willingness to suspend disbelief. A true bubble is marked by the belief that a compelling story or technology deserves any price, which is dangerous even when the underlying innovation is real. Tech and internet stocks in 1999-2000 were not just expensive; many were valued on concepts rather than earnings, assets, or sustainable cash flows. Growth can be genuine while still leading to poor returns if investors overpay; strong businesses can be bad investments at extreme valuations. VC and IPO markets become less attractive when too much money chases too few ideas, pushing up prices and weakening investor terms. First-mover advantage and market share are not enough if competitors can enter, undercut prices, and erase profits. The more a sector’s recent gains dominate headlines, the more likely latecomers are to extrapolate them and buy near a top. Market tops often occur when the last skeptic capitulates, not when fundamentals visibly break. Even if technology changes the world, investors must focus on company-level competitive advantage and durability, not just industry impact. Valuation eventually matters, even if it can remain detached from fundamentals for a long time.

Data Points: Bubble.com publication date: January 2, 2000 - The original memo discussed in the episode South Sea Company stock rise: £128 to £1,050 - Stock price increased from January to June 1720 during the mania South Sea Company collapse: below £200 - By September 1720, the stock had fallen more than 80% from its high South Sea Company peak decline: 80% - Drop from high within three months Sir Isaac Newton loss after buying back: £20,000 - Newton repurchased at the top and lost money Dot-com stock market weakness after peak: negligible returns for over a decade - Stocks from the 2000 high performed poorly until roughly 2012 Venture capital median returns, funds raised 1984-1989: 7.5% to 15.1% - Historical VC fund performance cited by Marks Venture capital median returns, funds raised 1990-1994: 20.4% to 29.7% - Improved but still not universal bonanza Top VC fund return for 1994 vintage: 235% per year - Strong outlier performance cited for the 1994 vintage Average VC fund return for 1994 vintage: 45% per year - Pulled up by top performers Median VC fund return for 1994 vintage: 22.5% per year - Shows dispersion beneath the average Bottom quartile VC fund return range for 1994 vintage: 6.4% to -13.2% - Illustrates downside among many funds Capital committed to VC funds in 1994: $7.8 billion - Funds committed despite lukewarm prior results Capital committed to VC funds in 1998: $26.1 billion - More than three times the 1994 amount after eye-popping returns Average 1999 IPO gain: ~160% above issue price - Average first-year/early trading performance of new issues Akamai IPO price: $26 - Went public on October 29 and surged on debut Akamai first-day close: $145 - Same day closing price after IPO Akamai market value at debut close: $13 billion - Implied by the first-day closing price Akamai 1999 first nine months sales: $1.3 million - Very small revenue base versus valuation Akamai 1999 first nine months loss: $28 million - Losses despite soaring market value Webvan September 1999 average order size: $72 - Raised questions about delivery economics Webvan first nine months of 1999 loss: $95 million - Against just $4.2 million revenue Webvan revenue: $4.2 million - For the first nine months of 1999 eToys market value lost: $7.1 billion - After stock fell 70% from its high VA Linux first-day gain: 698% - Record opening-day rise on December 9 VA Linux IPO price to close: $30 to $239 - First-day jump in 1999 VA Linux market value: $9.5 billion - At the close of its first trading day TheGlobe.com first-day gain: 606% - Previous record opening-day rise, from $4.5 to almost $32 Yahoo valuation: $119 billion - Marks cites it as worth more than GM and Ford combined Yahoo P/E: just over 1,000 - Based on 1999 estimated earnings America Online valuation multiple: almost 250x projected earnings - June year currently underway Cisco valuation multiple: above 100x - Projected earnings multiple cited Charles Schwab valuation multiple: 54x estimated 1999 earnings - Compared with Goldman Sachs at a lower multiple Nasdaq P/E ratio: 170 to 200 - Barron’s reported the ratio crossing 170 in November, possibly reaching 200 by year-end AOL + Microsoft purchase example: $625 billion for $25 billion sales and $7 billion earnings - Used to show how expensive tech leaders were relative to alternatives Industrial/financial/transport/utility comparables example: $635 billion for $747 billion sales and $43 billion earnings - Shows contrast in value and earnings versus tech Red Hat price-to-sales: about 1,000x annualized revenues - Illustrates extreme valuation when earnings are absent

Pivotal Quotes: "I can calculate the motions of the heavenly bodies, but not the madness of the people." — Sir Isaac Newton: Newton’s reaction after recognizing the speculative frenzy in the South Sea Bubble "No price too high is really the hallmark of a bubble." — Howard Marks: Marks defining the mindset that signals market excess "Being too far ahead of your time is indistinguishable from being wrong." — Howard Marks: On why earlier bubble warnings in 1996-1998 were premature, but his 2000 warning was timely

Implications: Investors should separate real innovation from overpriced enthusiasm, focus on cash flows and durable moats, and be wary when FOMO and headline returns dominate decision-making. Great businesses can still be bad investments if bought at bubble valuations.