Have you heard of the dot-com bubble incident ? If you are old enough to remember or perhaps heard it somewhere, the dot-com bubble which happened in the late 1990s was due to excessive speculation in internet related companies. The overly optimism and free-of-missing-out (FOMO) phenomenal pushed the equities valuation to skyrocket, however it couldn’t last long. The overvaluation of these companies ended up with ‘blood on the street’ (commonly used by traders/investors to describe a crisis in stock market).

Recently, I came across many interesting opinions from professional to noob traders/investors speculating recurrence of dot-com bubble. Does the current stock market behaviours give you the déjà vu ? Perhaps there are similar in someway but I’d like to share my analysis from a technologist cum beginner trader point of view.

In the past, technology companies used to generate revenue through sales of software/hardware and services. There are some challenges in evaluating the intrinsic values of these companies. Therefore, many investors bet on these stocks with the optimism or FOMO rather than the valuation based on company’s financial status. It’s undeniable there are huge potential, but, as investors it is always wise to verify the intrinsic values to avoid the trap of overvaluation. You wouldn’t want to pay $100 to buy an orange right ?
Now, what about the current stock market situation ? The pandemic has driven the stock market to go hay-wired. This is not triggered by financial crisis but global health crisis which could lead to financial crisis if the situation prolonged. Therefore, the stock market rally back in such a fast pace and the rally is lead by technology companies. The fear of dot-com bubble loomed traders/investors. However, I have a different perspective of the current market behaviour. The business model for technology companies no longer the same. Even though, technology companies are still classified in the technology or communication sectors, but I find this classification somewhat undermined the true potential of these companies. Technology companies actually span across various sectors, say for example, Amazon, should be at least Technology and Retail sectors. Selling online is similar to retail business with the absence of brick-and-mortar only. Merchants can sell anything online nowadays. In the old days, business use technology to ease the back office operational work. Today, technology has become an enabler or channel of business instead of just supporting the back-office only. Therefore, in my opinions if the bubble is going to burst, it is not the same dot-com bubble. It is due to the uncertainties caused by the pandemic. Some businesses are still recovering and unable to do business like before, causing the investment interest tilted towards technology companies.

Another area which I would like to highlight and I find it interesting to talk about is the demographic of traders/investors. Compared to decades ago, it is much easier to start trading/investing. You don’t need large capital or professional qualification to begin with. Information is everywhere and you can self learn and get started with merely initial capital of $200 and some broker offer $0 commission. With these new players in the market, things would not be the same. And also not to forget the robo-traders powered by artificial intelligence. I spoke to some traders and the opinions usually computer can’t beat human, which I agree to some extent. But, I think many still uncleared of what is AI and the true potential of AI. Often people confused between rule based algorithm vs AI which typically used in automated trading. A simple distinction is rule based algorithm is static but AI is dynamic. Artificial intelligence is emulating how human brain function and it has the potential to grow and learn like human does. The robo-trader you see today will not perform the same tomorrow. Just like a noob trader today might be professional trader tomorrow. The chances of robo-trader might perform better than human is the psychology. Machine has no emotion but human does. Even with high EQ, high probability and sharp decision making, we can’t function 24hr a day or consistently. The market is much more diversified nowadays with the new players. The speed and volatility are the elements we need to embrace.

Whether dot-com bubble is going to happen or not depends on the balance between investors’ optimism and true value of the companies. Simple it might sounds, but lots of hard works to evaluate the balance. I hope my two cents help or at least entertaining.

Stay safe and take care 🙂