2. Was the Disastrous Decline in Internet Stock Prices Expected?
By November 2000, 130 internet companies had collapsed as they dropped at least 75% from their market high. Before this free fall, Brunnermeier and Nagel expressed how hedge funds skilfully predicted that stock prices would deflate and had been “calling the bursting of the internet bubble”, thus traded accordingly to reduce holdings before prices collapsed. This finding is consistent with Griffin et al. who discovered that institutional investors, primarily hedge funds, profitability rode the bubble by meticulously selling-off dot-com stocks around the peak of the bubble.
In contrast, despite prices descending from March 2000, individuals were the net buyers of technology shares due to their inaccurate view that the growth stocks would continue to accelerate after their peak rather than spiral downwards. It seemed individuals were believing misleading guidance from a reputable business magazine informing that "the bull market doesn't end here".
Insider Issuing
Tartaroglu expressed that insiders, with superior information of the firms’ cash flows, sold more shares as prices ascended due to the higher risk of the stocks. The ratio of insider selling to buying climbed to sky-high levels. Insiders at dot-com companies, acting on a conflict of interest, actively withdrew from the technology sector and in February 2000 sold 23 times as many shares as they purchased.
Buffet's Briefings
Throughout the internet boom, Warren Buffet - America’s most acclaimed investor – continuously advised caution to investors and stated to “control enthusiasm” in high-technology stocks as the lofty valuations would evidently face reality. Despite facing criticism on his reluctance to capitalise on the boom, Buffet remained correct as the bear market bottom in 2002 saw the NASDAQ lose near 80% of the climaxed value in 2000.
Source: Business Insights
In conclusion, many experienced traders including hedge funds, insiders and Warren Buffet saw the reduction in stock prices to be inevitable due to the unsustainable levels prices were reaching. In contrast, average individuals were still optimistic that the growth stocks would reach their full potential.
