Understanding Stocks

WHY INVESTORS LOSE MONEY 169
As with most bubbles, most people didn’t know they’re in
one until it was too late. At the time, people thought the tulips
were wise investments that would last forever. In one sense, the
craving for tulip bulbs nearly lasted forever. Today, the Dutch
export millions of dollars worth of tulip bulbs to other countries—but
at more reasonable prices.)
This bubble popped rather abruptly and dramatically. People
stopped and looked around and wondered how anyone could pay
that much for an exotic flower. It was similar to a game of musical
chairs when the music stops. People who only a few months
before hadn’t been able to buy the tulip bulbs fast enough now
couldn’t sell them in time. Family fortunes were wiped out, there
was widespread panic, and the Dutch economy collapsed.
The closest the U.S. stock market came to a bubble occurred
during the Internet mania. It seemed as if the entire country was
deluded into thinking that every Internet stock would go up.
Companies like Excite at Home, Pets.com, HomeGrocer.com,
and hundreds of others were bid up to ridiculously high valuations.
At the time, some Internet companies with no earnings had
a higher market cap than some of the largest corporations in
America.
Just like the tulip bubble, the Internet bubble ended abruptly.
Investors also looked around and wondered how they could have
paid so much for companies with little or no earnings. Some people
are still holding shares of Internet companies that may never
come back to even.
In the next chapter, you will learn my thoughts about the stock
market.