Tuesday 28 April 2009
Thursday 16 April 2009
Should I discontinue my SIP?
January 28, 2009
Nowadays, a question that investors routinely pose to the Personalfn financial planning team is – “should I discontinue my SIP”. The downturn in equity markets has adversely affected the performance of equity funds. With portfolios languishing in negative territory, expectedly, investors are a worried lot. Some investors have concluded that now is a good time to discontinue ongoing SIPs. Is that the right strategy to adopt? Before discussing the same, let’s understand what an SIP (systematic investment plan) is and how it functions.
How an SIP works
Investing in a mutual fund via the SIP route entails making investments (often in smaller denominations) in a staggered manner as opposed to making one-time (lump sum) investments. This aids investors benefit from market volatility by lowering the average purchase cost. In an SIP, each installment i.e. a fixed sum of money is invested at the prevailing NAV (net asset value) on a predetermined date. In times of volatility, when the underlying fund’s NAV falls, it leads to a higher number of units being credited to the investor’s account.
For example, Rs 1,000 invested at an NAV of Rs 50, will result in 20 units being credited to the investor. However, should the NAV fall to Rs 40 in the subsequent month on account of turbulent markets, the investor will gain by receiving a higher number of units. In the process, the average purchase cost will fall as well.
An SIP investment makes market timing irrelevant. Timing markets involves attempting to make investments when markets are at their lowest and exiting at the peak. It’s a different matter that timing markets and doing so consistently is beyond most investors. By spreading investments over a period of time, the SIP mode does away with the need to time markets.
Finally, the downturn in markets has meant that several stocks are available at attractive prices. Also, the potential of the domestic economy to deliver over the long-term remains unchanged.
Now let’s come back to the original question – should investors discontinue their ongoing SIPs? Clearly, the discussion above suggests that now is the time to invest via the SIP mode, rather than discontinue ongoing SIPs.
The flipside
However, there is a need to understand that an SIP is a ‘means’ to achieve an end and not an ‘end’ by itself. In other words, the SIP should be aimed at helping investors achieve their predetermined financial goals. An SIP in isolation (i.e. one which doesn’t form part of a broader financial plan) or one in a poorly managed fund is unlikely to aid investors. The fund also needs to be right for the investor i.e. it should suit the investor’s risk profile and be equipped to aid him achieve his financial goals. Simply investing via the SIP route doesn’t eliminate the shortcomings of a fund or improve its prospects for the matter.
It is also pertinent that the SIP runs over a sufficiently long time frame. Often, investors are guilty of investing in a 6-Mth SIP, simply because, that is the minimum tenure offered by fund houses. Like investing for the long-term is pertinent in the case of equity investments, it is also important the SIP runs over the long haul i.e. at least 2-3 years. This can aid the SIP witness a falling market and deliver on the critical aspect of lowering the average purchase cost.
What investors should do
In conclusion, it can be stated that there is no standard answer for the query – should I discontinue my SIP? It would depend on the facts of each case. Although the benefits of investing via the SIP mode cannot be disputed, several factors need to be considered before making an investment decision.
For instance, investors who have the ability to take on risk, a sufficiently long investment horizon (at least 3-5 years) and are invested in funds that are right for them need not discontinue their ongoing SIPs. Conversely, others would do well to conduct a thorough assessment of their investments. The investment advisor has an important role to play in aiding investors with the latter. The key lies in not evaluating SIPs in isolation and thus making informed investment decisions.
Nowadays, a question that investors routinely pose to the Personalfn financial planning team is – “should I discontinue my SIP”. The downturn in equity markets has adversely affected the performance of equity funds. With portfolios languishing in negative territory, expectedly, investors are a worried lot. Some investors have concluded that now is a good time to discontinue ongoing SIPs. Is that the right strategy to adopt? Before discussing the same, let’s understand what an SIP (systematic investment plan) is and how it functions.
How an SIP works
Investing in a mutual fund via the SIP route entails making investments (often in smaller denominations) in a staggered manner as opposed to making one-time (lump sum) investments. This aids investors benefit from market volatility by lowering the average purchase cost. In an SIP, each installment i.e. a fixed sum of money is invested at the prevailing NAV (net asset value) on a predetermined date. In times of volatility, when the underlying fund’s NAV falls, it leads to a higher number of units being credited to the investor’s account.
For example, Rs 1,000 invested at an NAV of Rs 50, will result in 20 units being credited to the investor. However, should the NAV fall to Rs 40 in the subsequent month on account of turbulent markets, the investor will gain by receiving a higher number of units. In the process, the average purchase cost will fall as well.
An SIP investment makes market timing irrelevant. Timing markets involves attempting to make investments when markets are at their lowest and exiting at the peak. It’s a different matter that timing markets and doing so consistently is beyond most investors. By spreading investments over a period of time, the SIP mode does away with the need to time markets.
Finally, the downturn in markets has meant that several stocks are available at attractive prices. Also, the potential of the domestic economy to deliver over the long-term remains unchanged.
Now let’s come back to the original question – should investors discontinue their ongoing SIPs? Clearly, the discussion above suggests that now is the time to invest via the SIP mode, rather than discontinue ongoing SIPs.
The flipside
However, there is a need to understand that an SIP is a ‘means’ to achieve an end and not an ‘end’ by itself. In other words, the SIP should be aimed at helping investors achieve their predetermined financial goals. An SIP in isolation (i.e. one which doesn’t form part of a broader financial plan) or one in a poorly managed fund is unlikely to aid investors. The fund also needs to be right for the investor i.e. it should suit the investor’s risk profile and be equipped to aid him achieve his financial goals. Simply investing via the SIP route doesn’t eliminate the shortcomings of a fund or improve its prospects for the matter.
It is also pertinent that the SIP runs over a sufficiently long time frame. Often, investors are guilty of investing in a 6-Mth SIP, simply because, that is the minimum tenure offered by fund houses. Like investing for the long-term is pertinent in the case of equity investments, it is also important the SIP runs over the long haul i.e. at least 2-3 years. This can aid the SIP witness a falling market and deliver on the critical aspect of lowering the average purchase cost.
What investors should do
In conclusion, it can be stated that there is no standard answer for the query – should I discontinue my SIP? It would depend on the facts of each case. Although the benefits of investing via the SIP mode cannot be disputed, several factors need to be considered before making an investment decision.
For instance, investors who have the ability to take on risk, a sufficiently long investment horizon (at least 3-5 years) and are invested in funds that are right for them need not discontinue their ongoing SIPs. Conversely, others would do well to conduct a thorough assessment of their investments. The investment advisor has an important role to play in aiding investors with the latter. The key lies in not evaluating SIPs in isolation and thus making informed investment decisions.
Saturday 11 April 2009
The 1929 crash
In the previous article we had discussed the '1987 Crash'. A five-year 'bull' market, which started in 1982, came to an end in 1987.
In this article we will discuss the crash in 1929 which led to severe economic collapse during the early twentieth century.
The 1929 crash
After World War I, during the 1920’s, the American economy was fuelled by increased industrialization and new technologies. At the same time, a new concept of installment plans came into existence which gave birth to a culture of consumerism. With installment plans, American families could now afford to purchase more than ever before. America prospered in this decade and became the richest nation in the world. Aided by this spectacular growth, stocks were on a roll between 1921 and 1929; the Dow Jones Industrial Average rose six times during this period. Booming stock markets made people believe that the markets could only rise higher. Very soon this era turned into an era of intense speculation on the stock market.
But the exuberance started fizzling out by early September of 1929 as news about failure of several banks, lower housing projects and lower steel production started making headlines. The market peaked on September 3, 1929. At this point, the Dow was up 27% from the previous year. The prices started their downhill journey from here. On October 23, 1929 fear crept in and before the closing bell rang, stock prices suddenly plummeted. This event shook the beliefs of investors in the market and panic set in. The next day, prices further plunged and 13 m shares changed hands on a single day. That was the highest daily volume in the exchange's history at that point of time. The southward journey continued on the following Monday and the Dow registered a drop of another 13%. With no respite yet in sight, on October 29 the Dow dropped another 12%. The 1929 crash set off a chain of events that plunged the US and the world into a decade-long depression.
Economic woes further aggravated, as the government did not try to prop up aggregate demand. The Federal Reserve (FED) also did not use open market operations to keep the money supply from falling. Instead the FED raised interest rates and discouraged gold outflows after the United Kingdom abandoned the gold standard in the fall of 1931. And the FED let the private sector handle the Depression in its own fashion. This choked the economy and unemployment skyrocketed, companies incurred huge layoffs, wages plummeted and the economy went into a tailspin.
Conclusion
The stock market prices are based, in a great part, on expectations. Thus, in stock markets when investors believe stock prices will increase, it increases the demand for stocks. This increased demand continues until stock prices become too high in comparison to the intrinsic value of the related corporation. These overvalued stock price result in excess supply of stocks, which in turn causes prices to fall. When a lot of investors decide to leave the market at the same time then markets plunge and little can be done to prevent the markets from falling. Thus an investor should understand the dynamics of the markets and take it in their stride. As Peter Lynch quips "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
In this article we will discuss the crash in 1929 which led to severe economic collapse during the early twentieth century.
The 1929 crash
After World War I, during the 1920’s, the American economy was fuelled by increased industrialization and new technologies. At the same time, a new concept of installment plans came into existence which gave birth to a culture of consumerism. With installment plans, American families could now afford to purchase more than ever before. America prospered in this decade and became the richest nation in the world. Aided by this spectacular growth, stocks were on a roll between 1921 and 1929; the Dow Jones Industrial Average rose six times during this period. Booming stock markets made people believe that the markets could only rise higher. Very soon this era turned into an era of intense speculation on the stock market.
But the exuberance started fizzling out by early September of 1929 as news about failure of several banks, lower housing projects and lower steel production started making headlines. The market peaked on September 3, 1929. At this point, the Dow was up 27% from the previous year. The prices started their downhill journey from here. On October 23, 1929 fear crept in and before the closing bell rang, stock prices suddenly plummeted. This event shook the beliefs of investors in the market and panic set in. The next day, prices further plunged and 13 m shares changed hands on a single day. That was the highest daily volume in the exchange's history at that point of time. The southward journey continued on the following Monday and the Dow registered a drop of another 13%. With no respite yet in sight, on October 29 the Dow dropped another 12%. The 1929 crash set off a chain of events that plunged the US and the world into a decade-long depression.
Economic woes further aggravated, as the government did not try to prop up aggregate demand. The Federal Reserve (FED) also did not use open market operations to keep the money supply from falling. Instead the FED raised interest rates and discouraged gold outflows after the United Kingdom abandoned the gold standard in the fall of 1931. And the FED let the private sector handle the Depression in its own fashion. This choked the economy and unemployment skyrocketed, companies incurred huge layoffs, wages plummeted and the economy went into a tailspin.
Conclusion
The stock market prices are based, in a great part, on expectations. Thus, in stock markets when investors believe stock prices will increase, it increases the demand for stocks. This increased demand continues until stock prices become too high in comparison to the intrinsic value of the related corporation. These overvalued stock price result in excess supply of stocks, which in turn causes prices to fall. When a lot of investors decide to leave the market at the same time then markets plunge and little can be done to prevent the markets from falling. Thus an investor should understand the dynamics of the markets and take it in their stride. As Peter Lynch quips "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
The crash of 1987
In the previous article of this series we had discussed about the Asian Financial Crisis. The economies of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, had witnessed impressive economic growth rates in the world during 1980 to 1990 but these Asian countries began to crumble in early 1997 and lost a decade of economic progress due to this crisis.
In this article, we will discuss the ‘1987 Crash’. A five-year 'bull' market which started in 1982 came to an end in 1987, between October 14 and October 19, 1987 and major indices of the United States dropped 30% or more.
The 1987 crash
After 1982 companies listed on the US bourses started posting strong gains but soon the price of stocks outpaced earnings growth, thereby inflating price to earnings ratios. This led to markets becoming overvalued. This prompted an influx of new investors, such as pension funds, into the stock market during the mid 1980s. The increased demand supported the inflated prices. Furthermore, favorable tax treatments given to the financing of corporate buyouts, such as allowing firms to deduct interest expenses associated with debt issued during a buyout, which increased the number of companies that were potential takeover targets helped in pushing up their stock prices.
By mid 1987 the macroeconomic scenario turned less certain. The trade deficit of the US grew significantly. In order to manage this deficit, the treasury Secretary James Baker suggested the need for a fall in the dollar on foreign exchange markets. This move led foreigners to pull out of dollar denominated assets which caused a sharp rise in interest rates. The legislation regarding elimination of tax benefits associated with financing mergers also added to the fear and stock market started sliding.
The trading mechanisms in financial markets were not able to deal with a large flow of sell orders. This added to the woes of the stock market. Furthermore, insufficient liquidity also played a significant role in the size of the price drop. Stock markets and derivatives markets also failed to operate in sync and played their part during the crash.
Conclusion
The global markets have become more complex than ever. While financial innovations and new technology are creating new opportunities, they are also increasing the scope of miscalculation and mayhem. In times such as these panic is inevitable and anything rash that investors do might make the situation worse. So the best advice one can give to investors is to stick with their long-term investment strategy, and take advantage of the markets’ volatile movements. Especially, in the current scenario, given that there is all pervading pessimism due to the global financial crisis, now would be the time to buy good quality stocks at bargain prices.
In this article, we will discuss the ‘1987 Crash’. A five-year 'bull' market which started in 1982 came to an end in 1987, between October 14 and October 19, 1987 and major indices of the United States dropped 30% or more.
The 1987 crash
After 1982 companies listed on the US bourses started posting strong gains but soon the price of stocks outpaced earnings growth, thereby inflating price to earnings ratios. This led to markets becoming overvalued. This prompted an influx of new investors, such as pension funds, into the stock market during the mid 1980s. The increased demand supported the inflated prices. Furthermore, favorable tax treatments given to the financing of corporate buyouts, such as allowing firms to deduct interest expenses associated with debt issued during a buyout, which increased the number of companies that were potential takeover targets helped in pushing up their stock prices.
By mid 1987 the macroeconomic scenario turned less certain. The trade deficit of the US grew significantly. In order to manage this deficit, the treasury Secretary James Baker suggested the need for a fall in the dollar on foreign exchange markets. This move led foreigners to pull out of dollar denominated assets which caused a sharp rise in interest rates. The legislation regarding elimination of tax benefits associated with financing mergers also added to the fear and stock market started sliding.
The trading mechanisms in financial markets were not able to deal with a large flow of sell orders. This added to the woes of the stock market. Furthermore, insufficient liquidity also played a significant role in the size of the price drop. Stock markets and derivatives markets also failed to operate in sync and played their part during the crash.
Conclusion
The global markets have become more complex than ever. While financial innovations and new technology are creating new opportunities, they are also increasing the scope of miscalculation and mayhem. In times such as these panic is inevitable and anything rash that investors do might make the situation worse. So the best advice one can give to investors is to stick with their long-term investment strategy, and take advantage of the markets’ volatile movements. Especially, in the current scenario, given that there is all pervading pessimism due to the global financial crisis, now would be the time to buy good quality stocks at bargain prices.
The Asian Financial Crisis
In the previous article , we discussed about the dot com bubble. Dot com companies believed that the internet business would somehow instantly take off and the entire business landscape will change in a very short span of time. The hype didn’t live up to its promises. Unfortunately, the growth of the tech sector proved to be illusionary and the dot com bubble burst in the year 2001. In this article, we will discuss about the ‘Asian Financial Crisis’, which engulfed most of the South East Asian countries in the 1990s.
The Asian Financial Crisis
The economies of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, were posting some of the most impressive economic growth rates in the world during 1980 to 1990. Their Gross Domestic Product was compounding by 6% to 9% per annum during this period. A combination of inexpensive and relatively well educated labor, export orientation, falling barriers to international trade and heavy inward investment by foreign companies led to this impressive growth.
The wealth created by these countries fueled an investment boom in commercial and residential property, industrial assets, and infra-structure. However, this unprecedented investment boom was mostly financed with borrowed money. Furthermore, the investments were made on the basis of unrealistic projections about future demand. Very soon this resulted into significant excess capacity, which in turn led to a significant decline in prices. The companies that had made the investments started groaning under huge debt burden that they were now finding difficult to service.
By the mid 1990s, imports in these countries started growing dramatically, mainly aided by the investments in infrastructure, industrial capacity, and commercial real estate. This growth in imports moved the current account of their balance of payments into the red. To make matter worse, most of the borrowing to fund these investments had been in US dollars, as opposed to local currencies.
The growing deficits made it difficult for the governments of these countries to maintain the peg of their currencies against the US dollar. If that peg could not be held, the local currency value of dollar dominated debt would increase, raising a large scale default on debt service payments.
The Asian meltdown began in early 1997 in Thailand with a Thai property developer announcing its failure to make a scheduled US$ 3.1 m interest payment on an US$ 80 bn eurobond loan. This incidence raised the red flag and the Thai market started falling. Very soon the crisis percolated into the currency market. Thailand’s growing current account deficit and dollar denominated debt burden increased demand for dollars in Thailand and simultaneously decreased demand for Baht. Taking advantage of the situation currency traders began a concerted attack on the Thai currency. At that point of time, the Thai baht had been pegged to the US dollar at an exchange rate of around US$ 1=Bt 25. With this concentrated attack on Thai baht, the peg became difficult to defend. In order to defend the peg, the Thai government used its foreign exchange reserves to purchase Thai baht. The cost to defend the peg was US$ 5 bn, but Thai central bank had locked up most of Thailand’s foreign exchange reserves in forward contracts. Thus, Thailand only had US$ 1.14 bn available foreign exchange reserves left to defend the dollar peg. Ultimately, the Thai government had to bow down to the inevitable and the government allowed the baht to float freely against the dollar. The baht immediately started a slide. Following the devaluation of the Thai baht, a wave hit other Asian currencies and in a short spans of few weeks the Malaysian ringgit, Indonesian rupiah and the Singapore dollar all nosedived one after the other and the entire region was gripped by the crisis. These countries lost a decade of economic progress due to this crisis.
Conclusion
The region had been promoted by many as the future economic engine of the world economy. Investors have invested billions of dollars in the region on the assumption that the rapid growth of the last decade would continue. But it came grinding to a halt.
It once again proved that during periods of abundant capital, there is an often-irresistible temptation to anchor to false beliefs. This strategy may bear fruit for a while, but is costly over the long haul.
The Asian Financial Crisis
The economies of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, were posting some of the most impressive economic growth rates in the world during 1980 to 1990. Their Gross Domestic Product was compounding by 6% to 9% per annum during this period. A combination of inexpensive and relatively well educated labor, export orientation, falling barriers to international trade and heavy inward investment by foreign companies led to this impressive growth.
The wealth created by these countries fueled an investment boom in commercial and residential property, industrial assets, and infra-structure. However, this unprecedented investment boom was mostly financed with borrowed money. Furthermore, the investments were made on the basis of unrealistic projections about future demand. Very soon this resulted into significant excess capacity, which in turn led to a significant decline in prices. The companies that had made the investments started groaning under huge debt burden that they were now finding difficult to service.
By the mid 1990s, imports in these countries started growing dramatically, mainly aided by the investments in infrastructure, industrial capacity, and commercial real estate. This growth in imports moved the current account of their balance of payments into the red. To make matter worse, most of the borrowing to fund these investments had been in US dollars, as opposed to local currencies.
The growing deficits made it difficult for the governments of these countries to maintain the peg of their currencies against the US dollar. If that peg could not be held, the local currency value of dollar dominated debt would increase, raising a large scale default on debt service payments.
The Asian meltdown began in early 1997 in Thailand with a Thai property developer announcing its failure to make a scheduled US$ 3.1 m interest payment on an US$ 80 bn eurobond loan. This incidence raised the red flag and the Thai market started falling. Very soon the crisis percolated into the currency market. Thailand’s growing current account deficit and dollar denominated debt burden increased demand for dollars in Thailand and simultaneously decreased demand for Baht. Taking advantage of the situation currency traders began a concerted attack on the Thai currency. At that point of time, the Thai baht had been pegged to the US dollar at an exchange rate of around US$ 1=Bt 25. With this concentrated attack on Thai baht, the peg became difficult to defend. In order to defend the peg, the Thai government used its foreign exchange reserves to purchase Thai baht. The cost to defend the peg was US$ 5 bn, but Thai central bank had locked up most of Thailand’s foreign exchange reserves in forward contracts. Thus, Thailand only had US$ 1.14 bn available foreign exchange reserves left to defend the dollar peg. Ultimately, the Thai government had to bow down to the inevitable and the government allowed the baht to float freely against the dollar. The baht immediately started a slide. Following the devaluation of the Thai baht, a wave hit other Asian currencies and in a short spans of few weeks the Malaysian ringgit, Indonesian rupiah and the Singapore dollar all nosedived one after the other and the entire region was gripped by the crisis. These countries lost a decade of economic progress due to this crisis.
Conclusion
The region had been promoted by many as the future economic engine of the world economy. Investors have invested billions of dollars in the region on the assumption that the rapid growth of the last decade would continue. But it came grinding to a halt.
It once again proved that during periods of abundant capital, there is an often-irresistible temptation to anchor to false beliefs. This strategy may bear fruit for a while, but is costly over the long haul.
The dot com bubble
In the previous article we have discussed about ‘The Florida real estate bubble’ which started in the early 1920s, when Florida entered a period of frenzied real estate speculation. The bubble lasted for almost a decade and ended as the Great Depression began. Today we will discuss about the bubble that arose around the turn of the millennium – the dot com bubble.
The dot com bubble
The mid 1990s marked the beginning of a major growth of Internet users, who were viewed by companies as potential consumers. This prompted several entrepreneurs to venture into internet start-ups. These start ups came to be known as ‘dot coms’, as most of these companies had .com in their web addresses. At the pinnacle of the bubble many companies got engaged in unusual and risky business practices with the hopes of dominating their respective markets. Most of these dot com companies followed a policy of growth over profit. They assumed that if they built up their customer base, their profits would eventually rise. Investors responded to these risky business ventures with pots of money. With hundreds of companies being founded in a very short span of time, especially in tech hot spots like the Silicon Valley, the tech laden index NASDAQ rose dramatically during this time.
The euphoria was backed by the belief that internet business somehow would instantly take off and the entire business landscape will change in a very short span of time. However, no fundamental change was actually happening at the ground level. It was just wishful thinking on the part of companies that had no realistic business model to get these ideas off the ground.
The hype didn’t live up to its promises. Numerous high profile court cases regarding unscrupulous business practices started cropping up and the stock market began to tumble down. Unfortunately, the growth of the tech sector proved to be illusionary and dot com bubble burst in the year 2001. A decline in business spending combined with the market correction dealt a serious financial blow to many dot-com companies.
Conclusion
The internet caught the fancy of people in the 1990’s. This prompted many companies to promise life-altering changes. Though these ideas for change had a grain of truth in them, they were expected to deliver overnight instead of the decades they would actually require. The fundamentals of the dot com bubble were terrible. Most of the companies were not profitable and were having very risky business models. Some of them had no intention of ever making a profit. While the business model of these companies had no realistic way to turn a profit, their IPOs were skyrocketing just because of hype around them.
The burst of dotcom bubble once again highlighted the fact that the performance of a stock is dependent on performance of the company. As Peter Lynch says “I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”
The dot com bubble
The mid 1990s marked the beginning of a major growth of Internet users, who were viewed by companies as potential consumers. This prompted several entrepreneurs to venture into internet start-ups. These start ups came to be known as ‘dot coms’, as most of these companies had .com in their web addresses. At the pinnacle of the bubble many companies got engaged in unusual and risky business practices with the hopes of dominating their respective markets. Most of these dot com companies followed a policy of growth over profit. They assumed that if they built up their customer base, their profits would eventually rise. Investors responded to these risky business ventures with pots of money. With hundreds of companies being founded in a very short span of time, especially in tech hot spots like the Silicon Valley, the tech laden index NASDAQ rose dramatically during this time.
The euphoria was backed by the belief that internet business somehow would instantly take off and the entire business landscape will change in a very short span of time. However, no fundamental change was actually happening at the ground level. It was just wishful thinking on the part of companies that had no realistic business model to get these ideas off the ground.
The hype didn’t live up to its promises. Numerous high profile court cases regarding unscrupulous business practices started cropping up and the stock market began to tumble down. Unfortunately, the growth of the tech sector proved to be illusionary and dot com bubble burst in the year 2001. A decline in business spending combined with the market correction dealt a serious financial blow to many dot-com companies.
Conclusion
The internet caught the fancy of people in the 1990’s. This prompted many companies to promise life-altering changes. Though these ideas for change had a grain of truth in them, they were expected to deliver overnight instead of the decades they would actually require. The fundamentals of the dot com bubble were terrible. Most of the companies were not profitable and were having very risky business models. Some of them had no intention of ever making a profit. While the business model of these companies had no realistic way to turn a profit, their IPOs were skyrocketing just because of hype around them.
The burst of dotcom bubble once again highlighted the fact that the performance of a stock is dependent on performance of the company. As Peter Lynch says “I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”
Subscribe to:
Posts (Atom)