Explaining the Dot Com Crash to My Kids… and Why It Matters for AI Today

We’ve been investing in the stock market on behalf of our daughters (11 & 13) for many years. Occasionally, I show them a chart of how their investments are doing.

Over the last 5 years, their investments have doubled in value. As you can imagine, that got them excited.

I explained that whilst this was exciting, they shouldn’t get too carried away. The value of their investments could also fall significantly over a short period of time.

I also explained that part of the strong rise in the stock market over recent years has been driven by excitement around AI. Lots of people are investing money into companies that use AI, create AI products or provide the technology that powers AI.

This led to a conversation about another time in history when people became incredibly excited about a new technology: the internet.

The Dot Com Bubble and Crash

In the late 1990’s, everyone was excited about how the internet was going to change the world.

New internet companies were appearing everywhere. People were coming up with ideas and launching businesses to bring those ideas to life online.

As these companies gained attention, their value went up and up. Even though many weren’t making any money yet, investors believed they could become hugely profitable in the future because the internet seemed certain to change the world.

People heard stories of others making money from these internet companies and started to fear missing out. More and more people began investing, pushing company values even higher.

Eventually, excitement became so extreme that some companies were worth enormous amounts of money despite having weak businesses and little profit.

Example: Pets.com

One famous example was Pets.com.

Pets.com sold pet food and toys online. At the time, this sounded like an amazing idea. Investors believed online shopping was going to become huge, so they poured money into the company.

The owners spent enormous amounts of money trying to make Pets.com famous. They sold products very cheaply to attract customers and spent heavily on advertising — even running a Super Bowl advert, one of the most expensive forms of advertising in the world.

With all the excitement and hype, more and more people invested.

In early 2000, Pets.com was valued at more than US$300 million despite losing large amounts of money.

Eventually, people started asking an important question:

“How can companies like Pets.com be worth so much if they don’t make money?”

Investors began to worry that some of these internet companies might never become profitable. As a result, people started selling their investments.

Once prices began falling, other investors became scared and sold too. This caused prices to fall even faster, like a snowball rolling downhill. This lead to the 'Dot Com Crash'.

Many companies eventually ran out of money and went bust.

Survival: Amazon.com

Not all companies failed.

Amazon was one of the most talked-about internet companies in the late 1990’s. Like Pets.com, its value skyrocketed as excitement around internet companies exploded.

At the time, Amazon wasn’t making much money either, and many people believed the company would eventually fail. When the internet bubble burst, Amazon’s share price fell by around 90%.

Many investors panicked and sold their shares because they thought the company wouldn’t survive.

As you know, Amazon did survive. The difference was that Amazon had something very important: lots of real customers. It wasn’t just an exciting idea, people were genuinely using the business.

Over time, Amazon improved its business, expanded into new areas and eventually became hugely profitable. Today it is worth more than a trillion dollars.

I liked sharing the stories of Pets.com and Amazon because they highlight how difficult it is to predict which companies will succeed in the future.

Whilst it’s easy in hindsight to say Amazon would survive and become a great investment, at the time many people thought it was going to fail.

The AI Boom

There are some similarities between the dot com bubble and what is happening today with AI.

People and companies are investing huge amounts of money into AI businesses as they try to become leaders in this new technology.

I’ve heard stories of AI companies receiving millions of dollars of investment despite having very few customers or sometimes only an idea and lots of excitement. That feels similar to what happened during the late 1990’s internet boom.

As people see the value of AI companies rise quickly, more investors become interested because they don’t want to miss out.

Some people believe this excitement could eventually create an “AI bubble” similar to the dot com bubble.

If expectations become too optimistic, some AI companies may struggle or fail in the future.

However, I explained to my daughters that I could be completely wrong. AI may continue growing successfully and many of these companies could become very profitable businesses. The important point wasn’t to predict the future perfectly, it was to understand how excitement and emotions can influence investing.

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No Changes To Our Investment Strategy

As mentioned above, the AI bubble is just a theory and I have no idea whether there is actually a bubble or, if there is, when it might burst.

Because I can’t predict the future, I explained to my daughters that we aren’t changing our investments. We’ll continue investing in a global stock market index and keep adding money each month.

We also know that if markets do fall sharply, we have savings to support us. That means we wouldn’t be forced to sell our investments during a difficult period, as that’s when you can lose a lot of money, i.e., having to sell your investments when the market has fallen.

I’ve seen many people try to predict when a crash is coming, sell all their investments, and then miss years of market growth because the crash never arrived.

The only thing we are considering is building slightly more savings, which could give us extra flexibility if markets ever fall significantly in the future. This part of the conversation really interested my daughters.

Using the forest analogy, they quickly said:

“If a storm comes and the stock market falls, we should probably spend less and invest more.”

That made me proud because that’s exactly the long-term mindset I hope they develop.

Important Lessons from the Dot Com Bubble

The dot com bubble teaches some incredibly important investing lessons:

• Picking the winning companies is extremely difficult (Pets.com vs Amazon)

• Exciting technology does not guarantee investment success

• Timing the market is very hard because nobody knows exactly when prices will rise or fall

• Continuing to invest consistently is usually more successful than trying to predict crashes

• Market falls can create opportunities for long-term investors

Investing isn’t about predicting the future perfectly. It’s about being patient enough to survive the storms.

I truly believe that kids who learn about investing early in life gain a huge advantage.

I certainly wish I had started learning about investing when I was younger. That’s one of the reasons I wrote Grandpa’s Fortune Fables. I want more kids to understand investing, patience and long-term thinking from an early age.

Whilst researching this blog, I also learned some fascinating things about how Amazon eventually became so successful. There are some really interesting lessons there too, which I’ll share in a future blog. Make sure you subscribe so you don’t miss it.

Thanks for reading,

Will

P.S., I really appreciate all the reviews of my book Grandpa’s Fortune Fables. If you have read it, it would mean a lot if you could leave an online review. It really does help the book reach more families.