Tuesday, March 15, 2005

Lessons on bottom line learned

The Kansas City Star


It's always wise to remember anniversaries, both in matters of love and money. So let's take a moment to note the fifth anniversary of the great stock market bubble of 2000.

Time sure flies when you're making up for lost time.

Five years ago last Thursday, the Nasdaq composite index closed at an all-time high of 5,048.62, more than three times its level of March 1997.

Five years ago, the dominant topic on CNBC and the like was the wonder of the Internet, and how technology had created a new economic paradigm and new rules for investing.

The stock market touts made it seem as if we were all going to get rich without actually working. And we happily clicked along on the Internet to watch our investment portfolios miraculously reach for the sky.

Trouble was, there was no new paradigm. When it comes to valuing companies, the bottom line was still the bottom line. And when the investing public finally remembered that simple reality, the great stock market bubble of 2000 popped — sending us all back to reality.

The tech-heavy Nasdaq ultimately plummeted to a post-bubble low of 1,114.11 on Oct. 9, 2002, a staggering loss of 78 percent from its high.

Last Thursday, the Nasdaq closed at 2,059.72, up nearly 85 percent from the post-bubble low. But for those of you keeping score at home, the Nasdaq still trades roughly 60 percent below its all-time high.

The less tech-dependent broader market didn't get whacked like the Nasdaq. But it was still plenty ugly.

The Dow Jones industrial average, which peaked at 11,722.98 in January 2000, still trades about 8 percent off its all-time high.

The Standard & Poor's 500 stock index, which peaked at 1,527.46 in March 2000, still trades about 20 percent off its all-time high.

In some ways, we've been lucky in the wake of all the financial carnage caused by the bursting stock market bubble.

The bubble of 2000 didn't lead to another Great Depression, as happened after the stock market crash of 1929. And it didn't lead to a generation of suppressed economic growth, as happened after the Japanese stock market crashed in 1989.

Relatively speaking, the broader economy has weathered the stock market bubble of 2000 and the terrorist attacks of 2001 reasonably well.

The recession of 2001 was relatively mild and short-lived compared to historic averages. And the recovery, while hardly booming and frustratingly slow to generate jobs, has been sustained.

Today, however, there is renewed debate about bubbles in certain areas of the investment spectrum.

Some housing markets — primarily along the coasts — have seen prices double over the past five years, in part, because people who got burned in the stock market are investing their money in more tangible assets.

There are legitimate worries that some of those localized housing bubbles are about to burst. But Kansas City, which has seen its average home price increase by a relatively more moderate 31 percent over the past five years, doesn't fall into housing bubble category.

The energy sector, meanwhile, is soaring on worries about whether there will be enough crude oil and refining capacity to accommodate the emergence of developing economies such China and India, as well as our ongoing needs. The jury is still out on whether that is a passing bubble or a more fundamental long-term shift.

So, what have we learned from the bursting stock bubble?

Hopefully, we have a healthier skepticism.

We don't take the touts at face value. We don't think we're going to get rich quick. We save and invest for the long term. We diversify our holdings.

And we never, ever, take our eyes off the bottom line.

To reach Chris Lester, assistant managing editor-business,

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