Tech Bubble

A bubble in technology stocks that is charactericized by rapid appreciation of share prices, high valuations and giddy investory sentiment.  Despite admonitions from sober analysts that the craze cannot continue indefinitely, market participants are led to believe that “it is different this time”.

The most notable of tech bubbles was the dotcom bubble in the late 1990s that ended in early 2000. Buffett calls this “the Great Bubble”. It was a case of serious capital misallocation as many unprofitable companies (that never became profitable) raised capital in public offerings of stock and experienced a large appreciation in share prices. Eventually, they fell to prices that better reflected their business fundamentals.

Greenspan notes that technological advancements take time to be applied to business operations. Therefore investors should be cautious when lured with prospects of an investment in a hot technology sector, as it may not succeed, and even if it does, it may take years before businesses and customers adapt to using it.