>But wouldnt institutional investors and mutual funds take a more
>conservative stance to investing. In fact in some cases woudnt they be
>required to do so? Is there the same bubble in mutual funds indices?
There were dot.com mutual funds. The industry is highly segmented, with small and large funds specializing in all kinds of things, from highly targeted to broadly diversified. An S&P index fund isn't off *that* badly; I'm sure Munder's 100%-pure Internet Net Net fund is now a barely visible speck. I interviewed their manager for a piece in Wired a couple of summers ago; he told me that it was better when stocks had no earnings because 1) they can't be plugged into traditional valuation models, and 2) a stock with no earnings can't miss its target and disappoint Wall Street.
> As I
>understand it NASDAQ was originally formed to facilitate trading in over the
>counter stocks. The NASDAQ index no doubt contains most of the high-risk
>knowledge economy and dot.com stocks. Werent they the locus of the
>bubble--as indeed it was.
Some of those stocks were very big - Microsoft, Intel, Cisco. Take a look at Cisco <http://finance.yahoo.com/q?s=CSCO&d=c&k=c1&a=v&p=s&t=5y&l=on&z=m&q=l>. Even now it's got a market cap of $137b - IBM's only $188b, Ford, $46b. Look at Intel <http://finance.yahoo.com/q?s=INTC&d=c&k=c1&a=v&p=s&t=5y&l=on&z=m&q=l>, market cap $203b.
> The Dow JOnes would represent the older economy
>and long established companies woudlnt it.?
Actually Microsoft's in the Dow.
> The bubble was a localised
>bubble centred in the New Economy sector.
> Even the NASDAQ shows a doubling between the third quarter of 1996 and
>the present. Over 5 years that is 20 percent a year, not exactly a disaster
>for those who invested then. Of course that is no comfort for those who
>invested at the peak and expected 2 and a half times that.
You're thinking too long term. Investment psychology is driven by the recent trend; people are thinking about losses, not gains.
Doug