The upside of calamity: bubbles burst, hope floats
Something compels people to turn the ups and downs of the investment markets into a stick-figure morality play.
In the standard script, an upsurge in prices such as the bull market of the late 1990s becomes the embodiment of Greed. The decline that inevitably follows is Punishment meted out by the stern gods of the marketplace.
Man rides out to challenge Risk; Risk summarily knocks him off his horse with a devastating blow. The lesson learned, presumably, is never to try that again.
As artistic drama, this has always struck me as pretty flimsy material. As financial history, it's also two-dimensional and incomplete.
The latest version of the tale has been told and retold this week in observance of the fifth anniversary of the Nasdaq Composite index's peak on March 10, 2000. There is no denying the facts of the case.
From below 1,500 in early March 1997, this broad gauge of a marketplace abounding in technology stocks soared above 5,000 three years later. By June of 2002 it was back below 1,500 again.
The image left on the stock charts was of a mountain nobody ought to have climbed. After a market recovery in 2003 and 2004, the Nasdaq index, trading lately between 2,000 and 2,100, remains a fraction of its former self.
Large amounts of losses will never be recouped. The average of more than two dozen Internet and telecommunications mutual funds tracked by Bloomberg has posted a 19 percent annual loss over the last five years.
A representative example of Internet specialty funds, the Munder NetNet Fund, ''received $5.7 billion in gross inflows from November 1999 through April 2000 -- just as it was hitting its peak," reports the research firm Morningstar Inc. Total assets of the fund at last report stood at $786 million.
Still, all this calamity did have a positive side. As entrepreneurs of the new economy burned through the money they received from speculators, it wasn't wasted. They engaged in a kind of survival-of-the-fittest battle that helped to build the Internet.
With all the damage that was inflicted, the US economy and investors as a group are much better off now.
By one inflation-adjusted measure, the US gross domestic product was 29 percent bigger at the end of 2004 than it had been in March 1997, and 13 percent larger than in March 2000.
Total assets invested in mutual funds, which recently hit $8 trillion, are more than double where they stood in early 1997 and about 10 percent larger than their March 2000 total.
In aggregate, then, the harm done in the famous bursting of the Internet bubble hasn't proved fatal. One might even see it as a valid instance of ''creative destruction," a term coined by economist Joseph Schumpeter that was often cited at the top of the boom.
''Capitalism is by nature a form or method of economic change and not only never is but never can be stationary," Schumpeter wrote in 1942. ''Industrial mutation incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."
Must this process be so messy? Can't the benefits be obtained without so much wreckage? That's the great quest, for more gain and less pain. From all that is known about the investing game, however, it doesn't show much promise ever to evolve into a risk-free undertaking.
Risk is an essential counterpoint to reward. Without it prospective market returns would instantly shrink to about the level of a passbook savings account. Fear of loss provides a necessary discipline that appears to be unavailable from any other source.
To anyone who took a beating in the boom-bust cycle, it may come as meager consolation to be told the losses went for a good cause. Better to understand it that way, though, than to think the whole episode was merely a pratfall without a point.
Chet Currier is a columnist for Bloomberg News.
