Page 7 - MS Year in Review 2020

THE DOT.COM BUST OF 1990

Another crisis was the so-called The Dot.Com Bust of 1990. You might recall
that once the internet was discovered, there was a “gold rush” to create firms that

would purports to be “internet companies.” These were the so-called “Dot.Coms.”

The initial stock market success of some of the internet companies such as AOL and
certain other dot.coms led to a tsunami of others hoping to cash in. For example,
one of these was a firm called Webvan, which went from being a company a market

cap of $1.2 billion and 4,500 employees to being liquidated in less than two years!

During this period, the traditional metrics used to value companies such as its “PE
ratio,” “ROI” and evening earnings per se were abandoned as “old fashioned.” In

their place a new set of metrics including number of visits to a web site, pages
viewed per visit, and, my personal favorite, “eyeballs” as well as other “hyper
modern” constructs were used as a basis to rationalize what proved later to be

insane valuations.

The subsequent failure of approximately 99% of all dot.coms led me to a few key
lessons: First, a business must have revenue to be profitable! Where there is

revenue, there is potential profit. Also a business must have profit to have
value. Unfortunately, value is not 'the eyes of the beholder'; it is the discounted
worth of the stream of earnings and/or cash flow of the enterprise.

THE GREAT RECESSION OF 2007-2008

The most recent crisis until the current Coronavirus crisis was The Great Recession
of 2007-2008. This was a virtual collapse of the entire global financial system. Like

the other crises, it was a Black Swan event.

Yet there were foreshocks that offered a glimpse of preview of impending problems.
It seemed that housing prices were in a bubble. But bubbles can stretch for a very

long time before they burst.

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