TSP Market Crash Analysis 2000

The 2000 stock market crash resulted in a loss of almost $8 Trillion in wealth. But before we get to “The Bust” we want to talk about the “The Boom” in order to give you some perspective.

Dot Com CrashDuring the 1990s, the U.S. computer industry decided to focus on software development instead of designing and manufacturing computer hardware. The reason was quite simple:

Computer software yielded very high profit margins due to the low cost to produce. Think about it for a moment, all you had to do was dedicate time to produce the software. Once it was produced it was protected as intellectual property with patents which created a strong barrier to entry.

Computer hardware on the other hand became a highly competitive space because the parts were virtually indistinguishable which forced companies to compete on price. Couple this with the low manufacturing costs from Asian countries and the cost of the personal computer dropped significantly. This led to almost every home welcoming a PC in the 1990s.

Software companies saw their stock prices skyrocket in the 1990s, enthusiasm over the software business led to the creation of many small software startups. Businesses were literally being started out of college students’ garages. Practically every software startup hoped to become “the Next Microsoft”.

Look At This Boom!

Nasdaq 1996From 1996 to 2000, the NASDAQ stock index exploded from 1000 to 4,000 points.

These companies were being run by people who were barely out of college which isn’t considerably alarming except for the fact they were also going public and raising hundreds of millions of dollars of capital. Not to mention they lacked:

  • Clear business plans
  • Solid Earnings
  • Accountability of operations

One company Pets.com was actually losing money before it even went public in February 2000 yet had an IPO of $82 million. The stock reached a high of $14/share but eventually slipped to $.22/share before closing their doors in November 2000.

Then The Music Stops

Nasdaq 2000By early 2000, reality started to sink in. Investors soon realized the dot-com dream had grown into a classic speculative bubble. Within a year, the NASDAQ stock index crashed from 5,000 to 2,000.

Hundreds of stocks such as Pet.com, which once had multi-million dollar market capitalizations, were off the map as quickly as they appeared. Panic selling ensued as the stock market’s value plunged by trillions of dollars. The NASDAQ further plunged to 800 by 2002. One former high-flier, Microstrategy, slid from a lofty $350 per share to a pitiful $4 per share. At this time, numerous accounting scandals came to light in which tech companies had artificially inflated their earnings.

The Bust

7034067943_a767e20a1f_zSome people believe markets are rational and efficient. Meaning prices always accurately reflect all publicly known information and therefore outsmarting the market is impossible. Unfortunately what these people fail to realize is investors are irrational. We are prone to hindsight bias, overconfidence, and the prospect of great fortunes using minimal effort.

The key to successful investing is to recognize  we are susceptible to these crippling behaviors. Make no mistake, being aware and identifying these hindrances doesn’t make us immune but it gives us a significant advantage over other investors. If you couple this way of thinking while removing emotion and subjectivity from your investment strategy then you can without a doubt beat the market and significantly outperform your peers.

As of March 2000, companies like Constellation 3D, eNotes.com, simplayer.com, and Braintech saw their stock price appreciate by more than 1,000% despite having zero sales! They were simply an idea and had not made one ounce of revenue for the company. It took investors a while to come to their senses but over the next two years these stocks declined by an average of 98 percent. Some were driven by irrational greed; others subscribed to the “greater fool theory” which suggests even though they felt the investments were overpriced, they would still be able to make a large profit provided a greater fool buys their shares at a higher price sometime in the near future.

Major Timeline of Events In 2000 Crash

Here is a major timeline of the events in the 2000 crash coupled with a chart that has our indicator.

  • Mar 2000 – AOL & Time Warner form worst merger in corporate history
  • Mar 2000 – Well respected th investment magazine “Barrons” writes cover story titled “Burning up”
  • Apr 2000 – Microsoft violates antitrust laws
  • Aug 2001 – Enron Scandal started to unfold
  • Sep 2001 – 9/11 attack on the WTC and Pentagon

2000 Timeline

So what happened in between early 2000 and late 2001? Surely there had to be some notable catalyst on record for this crash. We can assure you, we searched long and hard for an exact catalyst for this bear market but truth be told it was simply greed followed by fear.

Investors had pushed the market so high it was literally a financial game of hot potato. Buy buy buy buy until one day the last person holding the stock had nobody else to sell it to. Investors started to realize they would never ever be able to see a return on their money and they sprinted towards the exit door.

The Survivors

Nobody left the Dot com crash unscathed, not even solid blue chip companies who actually had something to offer. We find these charts will give you some perspective on how absurd valuations in stock prices became back in 2000. We apologize for not digging a little deeper to grab historical prices for companies who are no longer in business but we believe these charts will deliver the same message.

These big names survived but look at how they performed over time…..

Dot com Crash MSFT

Dot Com Crash ORCL
Dot Com Crash CSCO

Dot Com Crash INTC

As you saw these 4 tech companies are just now getting back to their valuations back in 2000 if at all!

Stop Making It Hard For Yourself

In our 2008 analysis of the stock market crash and TSP portfolios we explained how you do not need to stay on top of every single market move and financial announcement.

Most people believe you have to be on top of every single job report, Federal Reserve announcement, etc in order to make sound financial decisions regarding the stock market.

I’m here to tell you that is not the case at all. With technical analysis you have the luxury of cutting out all of the financial noise otherwise known as constant news regarding the market. The truth is most fundamental information gets priced into the market fairly quickly. A successful, proven, and easily understandable system is far more valuable than the plethora of financial news at our fingertips. Most people would think the more information available to investors the better but that is not true at all. Unfortunately what happens when an investor is inundated with so much information they suffer from what we call “analysis paralysis.” They analyze every single piece of information they take in, then they get inundated with another wave of information they need to analyze, and before they know it they’re in this vicious cycle and never get around to making a decision.

We also stated our intent is to educate our subscribers, not just simply providing recommendations. If you want a recommendation regarding the stock market you can get that almost anywhere. What we want to do is make sure you understand why certain things are happening within the market and ensure you have the confidence to be solidified in the choices you make with your investments.

Before The Market Crash

From bottom to top the bull market accrued an impressive 500% gain!

TSP Portfolio - Bull Market 2000

During the bull market from early 1991 to 2000 there were 6 notable corrections to the bullish trend. Each correction ranged between approximately 5-9% along with a 17% outlier before climbing higher, take a look below.

TSP Portfolio Pull Back

You have to remember all trends both bullish and bearish have to take a breather. It’s impossible to sprint nonstop without stopping to catch your breath, the same theory holds true for the market. So the next time you see a one day drop which seems significant keep the big picture in mind.

However, every bull market must come to an end.

TSP Portfolio 2000 loss

This is how our indicator performed during the bull market. It was able to capture a 298% gain of the bullish trend not the full 400%. Some may view this as a failure but you have to remember trying to predict bottoms and tops is futile. You will never consistently identify the tops and bottoms of any market.

Furthermore, you have to understand this system’s bread & butter doesn’t come during bull markets. The proverbial “moment of truth” comes during bear markets. Remember it’s not how much you can make, it’s how much you can keep. As you can see, our indicator signaled for us to get out of market with a 13% loss from the bullish peak. This saved us from the catastrophic loss of 46% Loss.

Let’s Take A Look At An Example

  • John’s TSP Portfolio = $50,000
  • 1991-2000 Bull Market w/ TSP Newsletter (Conservative) = $149,000 Gain
  • John’s TSP Portfolio (Out of the Market) = $199,000
  • John’s TSP Newsletter Expenses = $1,074

So in theory John spent $1,074 over the course of 9 years, gained all sorts of insight and knowledge, then produced a $149,000 gain at the end. We can all agree that’s a good deal by any measure. Now let’s look at another example:

  • John’s TSP Portfolio = $50,000
  • 1991-2000 Market w/ “Buy & Hold” Method = $66,500 Gain
  • John’s TSP Newsletter Expenses = $0

Profits Will Return To Your Portfolio

The market crash which ensued in 2000 took about 30 months to unfold before our indicator put us back into the market. During that time frame newly found day traders had to move back in with their parents and get a job. The majority of individuals who “struck it rich” in the market found themselves headed back to traditional jobs in order to cover expenses for their family. Every single person avoided the stock market like the plague and vowed never to return.

With that being said, you have to remember this all took two and a half years to unravel. If you were subscribed to the TSP Newsletter which specializes in TSP Funds & allocation you would have received 30 newsletters ultimately telling you to stay out of the market. As we stated before, patience in the market is hard for a lot of people and that’s why we strive at providing so much education in our newsletters. This will help you build the confidence to stay in the market when you’re suppose to and exit the market when you’re suppose to.

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