During the run-up to the new millennium, I was a corporate
finance partner in Ernst & Young’s London office. One of my
responsibilities was taking over as the head of the firm’s technology incubator
business in late 1999. Before that time, I’d been working in the private equity
market, mainly focused on management buyouts of mature businesses where paying
a double-digit earnings multiple for any company was pushing the boat out. So,
you can imagine my surprise at the crazy valuations mooted for dot-com
companies when I took control of the incubator. It felt as though I’d landed on
another planet.

Late 1999 was the era of the dot-com bubble when companies only
a few weeks old were being valued on multiples of prospective revenues or the
number of page visits on their nascent websites. Those of us who were brave
enough to ask about earnings were stared at as if we were speaking another
language. “You just don’t get it,” people would say to me. “There’s a new
paradigm; earnings don’t matter.” A few weeks after I took over, the market
peaked. By March 2000, the Nasdaq index had risen 400% in five years; it rose
almost 90% in 1999 alone, when companies such as Qualcomm rocketed in value by
almost 3,000 percent.

Irrational exuberance took over. I met experienced cab drivers
who’d tell me they were thinking of giving up driving as they had made so much
money investing in the market that year. Some of the new graduates I met
shortly after they joined the firm spoke in awe of their friends who’d turned
down offers from blue chip firms in order to become full-time day traders or to
launch their own dot-com venture. The world went crazy.

The bubble burst in March/April of 2000, right after the
Nasdaq Index hit a peak of 5,049. In early April, Bloomberg published a widely
read article that stated: “It’s time, at last, to pay attention to the
numbers”. Then Alan Greenspan, Chair of the Federal Reserve, started
raising interest rates, and the markets fell off a cliff. By the time it troughed
in 2002, the Nasdaq index had lost almost 80% of its value. So much value was
wiped out, it took around fifteen years for the index to recover its 2000 peak.

I feel the same nervousness today. This year, the Nasdaq has risen by more than a third. Even the broader S&P 500 index is up almost 30%. And yet total 2019 net income for companies within that latter index is expected to fall between one and two percent. It’s as if the numbers don’t matter again. While I don’t work in London any longer, so I no longer get to meet cabbies or new graduates, everywhere else I look, complacency about asset prices abounds. Irrational exuberance has taken hold.

I can’t help but feel it’s 1999 all over again.