A Critical Analysis of Investor Valuation Mistakes in Dot Com Bubble

This essay examines the Dot Com Bubble, arguing that it was a period of significant valuation errors for investors. The bubble, which occurred around the turn of the millennium, saw the NASDAQ rise dramatically due to the popularity of internet-based start-ups. However, the subsequent crash from 2000 to 2002 resulted in a massive decline in the index, taking investors fifteen years to recover their losses. The essay notes that almost half of the start-ups went bankrupt due to aggressive growth policies that prioritized brand recognition over infrastructure. Companies spent heavily on advertising and offered services at reduced prices, leading to cash outflows exceeding inflows and ultimately causing the bubble to burst. The analysis references works by McAleer, Suen, and Wong (2016) and Menzel, Feldman, and Broekel (2017) to support its claims regarding the market's instability and the impact of institutional changes during this period.

Running head: DOT COM BUBBLE
Dot Com Bubble
Name of the Student:
Name of the University:
Author Note:

1DOT COM BUBBLE
Table of Contents
Dot Com Bubble:.......................................................................................................................2
References:.................................................................................................................................3

2DOT COM BUBBLE
Dot Com Bubble:
Argument:The Dot Com Bubble was a valuation mistake for investors.
The Dot Com bubble is a crash which happened during the start of the millennium
and was created in the last century. In that period the new technology of internet was gaining
popularity and start-ups which were internet companies were attractive investment
opportunity. This led to an increase in the NASDAQ to 5000 level from 1000 level in a
matter of five years. However, when the bubble busted in 2000 and lasted through 2002 the
index had fallen to a level of 1100. Thus to achieve the same level of 5000 it took 15 years
for the investors after the loss in the bubble (Menzel, Feldman and Broekel 2017).
Almost 48% of the start-ups declared bankruptcy in the bubble, while some major
companies were able to recover and survive the bubble. The overvaluation of the companies
along with the increase in the fed rate made investors consider their investments. The market
fell more than it rose as many investors liquidated from other holdings to invest in technology
stocks.
The main reason for the companies to go bankrupt was the aggressive growth policy
adopted by all the companies. The companies spent more on advertising to create brand
recognition rather than on infrastructure of the companies. The companies offered their
services at reduced prices and thus with the increase in competition the prices were further
reduced by the companies. The cash outflow of the companies was greater than the cash
inflow of the companies which led to piling of debt in the companies and bursting of the
bubble in 2000 (McAleer, Suen and Wong 2016).

3DOT COM BUBBLE
References:
McAleer, M., Suen, J. and Wong, W.K., 2016. Profiteering from the Dot‐Com bubble,
subprime crisis and Asian Financial Crisis. The Japanese Economic Review, 67(3), pp.257-
279.
Menzel, M.P., Feldman, M.P. and Broekel, T., 2017. Institutional change and network
evolution: explorative and exploitative tie formations of co-inventors during the dot-com
bubble in the Research Triangle region. Regional Studies, 51(8), pp.1179-1191.