The Biggest Lesson of the Dot-Com Bubble

Wall Street has infamously had its share of ugly Octobers, so Alison Southwick and Robert Brokamp chose this month to offer their listeners a special treat: a four-part series on the history of market crashes in the United States.

In this Motley Fool Answers podcast, guest and former Fool Morgan Housel leads the discussion on a topic near and dear to the hearts of online-based operations like the Fool: the dot-com bubble and the subsequent long and painful crash. So what could that unpleasant episode teach investors? Hint: It's a lesson that we could have learned just as easily a century earlier, when the world-changing technology was the automobile.

A full transcript follows the video.

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This video was recorded on Oct. 17, 2017.

Alison Southwick: What did we learn from the dot-com bubble?

Morgan Housel: If you look at other new industries that changed the world, one I think of is the birth of the car industry in the early 1900s. There were hundreds if not a thousand car manufacturers in the early 1900s, and three of them survived -- Ford, Chrysler, and GM. I think the same thing happened with the internet, where you had thousands of people try their hand at this new technology that clearly was going to change the world, and a very small handful of them survived.

You talked about Ask Jeeves earlier. That was one of the big search engines. There was AltaVista and all these other new search engines. Dozens of people that could see the opportunity and tried their hand at it, but in the end it was pretty much Google that won. You have one company that won it in the end.

And there's always that big culling of the herd that happens whenever you have a new industry. Thousands of people trying and only a few will make it. And because of that, in hindsight, you're going to have all these horror stories from the 99.9% of companies that didn't make it. And then you have investors that lost a ton of money on those, and that scars them for a whole other generation.

But the car industry itself changed the world and changed how we live, and the internet did the same thing, even if along the way it burned not just a few people but most if not almost everyone who partook in it. That's the risk of new industries. Even when you can identify this industry is going to change how we live, identifying the specific company -- I don't want to say a needle in the haystack -- but close to it that's going to be the survivor is incredibly difficult to do. And if you are going to play that game, I think preparing yourself that the success rate of these companies, that are not only going to survive but thrive for decades after it, is in the single-digit percentage in terms of success rates.

David Gardner is one who is not only good at identifying companies that are going to do well, but more importantly I think he has the disposition to deal with the loss rate that comes along with identifying new industries. It's not that he's happy about it, but I think he has the disposition to be OK if half the companies in his portfolio do extremely poorly, knowing that one or two are going to do really well and drive that portion of his portfolio.

Robert Brokamp: Warren Buffett famously stayed out of all this. He said it wasn't in his circle of competence and he wasn't going to buy these types of stocks. But I remember him saying that the internet is going to be very good for consumers. I don't think it's going to be all that great for most investors. And I think it's true. It did change our lives, but it didn't do much for a lot of investors.

Housel: We could sit here and come up with 10 companies that probably make up more than 90% of the money that's been made in the internet in the past 20 years. Google, Facebook, Amazon. It's not many for thousands of companies that went public during this time.

Southwick: I was in college in the '90s, and I went to school with a guy. We were in Walla Walla, Washington.

Housel: You just say that because it's fun to say.

Southwick: It's fun to say. And Google was just becoming a thing, and so he decided to go out and buy different variations on Google, because people couldn't remember to type "Google" into their search, and so he bought Boogle. He bought Woogle. He bought Floogle thinking that someday Google would pay him...

Housel: He just opened a Dr. Seuss book and came up with all these different variations.

Southwick: He just rhymed "Google" with everything. He thought someday Google would pay him to get these domains to redirect them to Google because no one would be able to remember Google. And it worked! Google called him up. They were like, "You need to sell us Boogle, and Moogle," and whatever. But he should have held out longer, because this was still in the '90s when they paid him off.

Housel: That's smart. I know there are people that do that. As soon as a celebrity, or a singer, or a movie star has even a tiny bit of success, they go in and buy every different variation of their name as a Web address to do that. And related to that, just became Tesla's website address six months ago. Before that it was because someone else owned and just sold it back to the company very recently.

Southwick: Oh, I bet they made so much money for that. I would have charged them all the money.

Housel: It was probably quite a bit.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alison Southwick has no position in any of the stocks mentioned. Morgan Housel has no position in any of the stocks mentioned. Robert Brokamp, CFP owns shares of Facebook and Tesla. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Ford, and Tesla. The Motley Fool has a disclosure policy.