A guest post by the wonderful Mrs. Micah. About her reflections on the stock market and investing. Please check out her site at Mrs. Micah’s Financial Life.
Since I was only 14 in early ‘00 when the dot-com bubble burst, I can remember all the news stories and worries but I didn’t quite understand what was going on. Recently, I’ve been reading up on the whole situation in an effort to clarify my memories and to learn from the mistakes others made.
A shared phenomenon I’m noticing among many web “millionaires” was millions of dollars on paper (stock in various .coms) that suddenly became worthless. What got them in big trouble wasn’t necessarily owning millions of dollars in overvalued stock, it was acting as if they had millions of dollars.
They thought that the numbers in their portfolio translated into real wealth. So they financed giant houses, boats, all kinds of expensive stuff because they were millionaires. Only they weren’t millionaires at all. The money wasn’t really theirs yet. The stocks were theirs, but the money wouldn’t be until they sold the stock.
If they’d lived based on their salaries, they would have lost part (or all, depending on how they invested) of their retirement and other investments but they would not have ended up so deeply in debt.
We buy stocks because they earn dividends and/or interest. We expect the price to rise so that we can eventually sell at a profit. But until we sell, all we actually own are the stocks/funds. And while we know what they’d sell for today, that doesn’t mean we have the actual money.
It’s quite smart to be invested in the market—one of the best ways to beat inflation. Simply saving the money in your average bank guarantees that inflation will take out a major chunk and you’ll lose money.
It’s also smart to keep track of our investments, find out how much they’re worth, and so forth.
The problem only comes when we start acting as though those investments are cash in hand. If we want to live expensively, then we can sell some stock (or find the money elsewhere, like our salaries) to pay for it. But banking on our stock as the only thing that supports our spending habits is just a bad idea.
You don’t want to be left with worthless stock AND a mountain of debts you have to pay off. So while checking your stocks, remember that all you really own is the stock. Enjoy its value, but don’t bank on it until you have the cash in hand.
3 responses so far ↓
2 Jim ~ mydebtblog.com // May 3, 2008 at 3:32 pm
For the most part you are correct in that many of the DOT COM millionaires were only because they had their money tied up in the market, not cash on hand. They are probably no different than other people with high net worth, unless they cashed out stock to buy real estate. You never know what the market is going to do. A lot of these people got greedy, went after the luxuries and such, until the BOMB crashed their party. I remember having Yahoo! stock and it got up to the point it was worth over $100 a share, then split 2 for 1. I was only 18 then and after it tanked I sold it off for maybe $70 bucks total. My days of single stock are over and much prefer mutual funds with long term growth. The best rule when it comes to investing is never put all your eggs in one basket.
3 cinzea // May 4, 2008 at 8:34 pm
Having lived through the dot com disaster, I find this information to be somewhat naive and erroneous. The dot com bubble was based on the premise that a new form of commerce could be transacted across the internet. The idea was that brick and mortar stores (which I owned) were going to be wiped off the face of the earth. I know, I know, preposterous, right? But Wall Street and all those young, punk kids (yes! that’s what they were) poured billions and billions of venture capitalist (stock) money into these new dot coms that touted riches beyond your wildest expectations. The dot com basis was that if you sold items over the internet for less than retail, (tax free) you would thereby swoon customer loyalty and retire rich and immensely happy. I used to have people come into my computer store, I would demonstrate and show them all the latest gadgets and then these buyers would go off and buy these same gadgets, off the internet, and for less than retail. In fact, they bought the stuff LESS than wholesale. What happens to a dot com ‘owner’ when it sells its wares LESS than wholesale? You most assuredly do not get customer loyalty (since they are only shopping price anyway and will look somewhere else for a better price) nor do you stay in business for long. When an ‘owner’ buys high and sells low……..he/she goes out of business regardless if it is on the internet or not.
So, the dot coms came crashing down because they never followed the old, tried and true business measures that have been in practice since Cain sold his first carved bone to his brother Able. The dot coms went out of business and most brick and mortar stores (include me in this part) had to shutter our doors because NO ONE was buying our inventory.
Just like the modern day housing mess of today, man, in his infamous wisdom, thinks there is a sure get-rich-quick scheme to make him/her self a millionaire. When you buy a house, you have to put 10-20% down, be able to afford the mortgage, 15-30 year conventional, fixed rate mortgage. In other words, buying a home also has an historical tried and true way of making the purchase. Buck the system? Well, it’s taking ALL of us down with them. This is a bigger problem than the dot com. People today used their homes like a revolving cash machine rather than a place to just live, raise a family and just plain enjoy their lives.
So, not only did I suffer financial hardship from the dot com disaster, I have to suffer again, at the hands of Wall Street maniacs and other get-rich-schemers again. This time, however, I learned my lesson. Not having debt of any kind is helping me skate through this housing mess. I own my own home, car and do not have debt of any kind. I don’t live in fear of losing my job, because I don’t need one anymore.
Perhaps a new generation will learn the lessons of the housing mess.
Who knows?
When Are Your Investments Worth Anything? at Living Almost Large - May 3, 2008
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