11 The Dot Com Bubble Of The 1990s and Its

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					      How To Prosper In The Changing Real Estate Market



11: The Dot-Com Bubble Of The 1990s and Its Lessons For
the Current Real Estate Market
Most of us remember the Dot-Com bubble, the most recent and therefore for many of us most
concrete example of a bubble bursting. We heard of dot-com millionaires, Silicon Valley became
synonymous with Super Bowl commercials, and new dot-com companies popped up every day.
At a certain point though, enough people realized that these dot-com companies were not earning
profits and that they never would, and that change in mentality meant that the dot-com boom was
over. Below is a graph showing the meteoric rise of the NASDAQ to 5,049, and subsequent
plunge to 1,139.

                                    Nasdaq Stock Market from 1995 to Present
            5,200
                                                                                                                           5049

            4,700


            4,200


            3,700


            3,200


            2,700


            2,200


            1,700


            1,200
                                                                                                                                                                  1140

             700    F   e   b




                                1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
                                -     F   e   b   -   F   e   b   -   F   e   b   -      F   e   b   -   F   e   b   0
                                                                                                                     - 0          F   e   b   -   F   e   b   -     F   e   b   -       F   e   b   -   F   e   b   -




One of the reasons for the NASDAQ’s rise is that in the late 1990s the Federal Reserve under
Alan Greenspan lowered interest rates, which encouraged venture capitalists to invest their
capital in Internet startups. The problem was that with all of the capital flowing into this sector
spent on advertising the capital did not translate into consumer spending which ultimately was
the downfall of many companies.

One of the lessons learned in the dot-com bust is the greater fool theory. As long as a greater fool
came along and bought your stock for a higher price, you were okay. Rather than the smart
money that gets out before the top, the term dumb money cropped up to represent the unknowing
investor who blindly bought following the crowd, ‘the greater fool’. Real estate investing
presents an even larger threat for the ‘greater fool theory’ as people feel more secure investing in
real estate and taking on large mortgages to pay for it. The ‘greater fool theory’ is like the classic
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