The (1999-2001) Dot-Com Bubble Brief History

In this video, you’re going to learn exactly what the dot-com bubble was, what happened during it, and what we can learn from it. From the late 1990s into the early 2000s, investors got swept up in the belief that any company with a “.com” at the end of its name was a ticket to easy money — and for a while, it really looked that way.

For example, Amazon went public in May 1997 at $18 a share, giving it a market value of about $438 million. By December 1999, its market cap had skyrocketed to roughly $25 billion — that’s a 5,600% return — Also, Amazon didn’t actually even become profitable until 2003. Another example is eBay, which launched in 1995 as an online auction site. Its shares jumped more than 2,500% between 1997 and 1999.

Stories like these convinced investors that even if a dot-com company wasn’t profitable yet, it didn’t really matter — as long as it was growing visitors, clicks, and users, because the internet was seen as the future and huge cash flows & growth were right around the corner.

Many companies didn’t even have a real business model behind the hype. One of the most infamous examples was Pets.com, which sold pet food online. They raised $82 million in a February 2000 IPO and spent over 42 million of it on marketing — including this memorable Super Bowl ad — Yeah, but what's even more incredible was their abysmal gross margins, simply put, they had total revenue of 5.78 million and the product cost alone was 13.4 million which puts gross margins at a whopping -131.66%. Needless to say They filed for bankruptcy nine months after their IPO.

Another one, Webvan, an online grocery delivery start-up, raised about $800 million, expended all their capital building refrigerated warehouses all over the country, and filed for bankruptcy in 2001. Big names weren’t immune to the frenzy either, — Yahoo!’s stock went from about $1 per share in 1997 to over $110 by the peak in 2000 and they of course made countless acquisitions that were extremely questionable including the infamous Mark Cuban Broadcast. Com 5.7 billion dollar SBC transaction that Yahoo ran straight into the ground.

The NASDAQ index, which is waited towards tech companies, more than doubled in 1999 alone and hit a record of 5,048 points on March 10, 2000. To put that in perspective — if you had bought the NASDAQ at its peak, you wouldn’t have broken even until mid-2014. That’s 14 years of waiting just to break even.

Reality always hits, it's just a matter of when and what's gonna catalyze it. A few weak earnings reports from companies like Motorola and Lucent quickly showed investors that revenues and profits weren’t catching up to these sky-high valuations. People started selling to lock in gains, margin calls kicked in, and the rush of money that had pushed prices up began trying to gush out even faster. I like Warren Buffett’s quote , “Confidence is built one by one, but fear comes all at once.”

Over the next two and a half years, the NASDAQ fell by about 78%, wiping out nearly $5 trillion in wealth. Hundreds of startups — Boo.com, Kozmo.com, DrKoop.com, TheGlobe.com, and many more — either went bankrupt or saw their stock prices crash by more than 90%, including Amazons stock went from about $5 a share to touching 30 cents per share in october of 2001, adjusted for splits. More than 1,000 companies were even delisted from the NASDAQ because their shares traded under $1 a share for too long. Around 200,000 tech workers lost their jobs, and the crash actually tipped the U.S. economy into a short recession in 2001.

The dot-com bubble showed how hype and greed can blind investors to reality and fundamentals. On the positive side, it  really left behind a foundation which is the infrastructure, the ideas, and the lessons — that helped build many of the successful tech companies we see today.

Title: The Salad Oil Scheme That Crashed The Market (1963)

Script: At 1:40 PM eastern time on Friday November 22 of 1963 the news of John F. Kennedy’s assassination spread rapidly. Just 20 minutes later at 2:05 PM the Dow Jones had crashed nearly 5% and The NYSE ruled to close early that day at 2:07 PM to prevent further market losses. At this same period, American Express, Bank of America and other financial institutions saw their stock prices start to fall rapidly. American Express shares dropped nearly 50% from previous highs. Very few people have heard about The Great Salad Oil Swindle which was in part to blame for these quick and rapid market losses. In this video, we will cover the story of the great salad oil fraud, the markets reaction to it and at the end, a side story of how Warren Buffett capitalized on the markets reaction. Make sure to do me a favor by liking or subscribing before we begin.

Anthony “Tino” De Angelis was a con-man. He put on a good show as a businessman but he was always seemingly doing a con of some kind. He was born on November 3, 1915 to Italian immigrant parents in the Bronx. In the 1930’s while still a teenager he managed about 200 employees in a meat and fish market. Around this time, he had learned through his business contacts that the US government would take almost anything offered to it to fill the national mandates for school lunches. A con man at heart, this sparked an idea in his mind. Years down the line he was able to work his way up at this company and eventually become president in 1949 of Adolph Gobel. During his time as president, he secured a large government contract, where he specifically prompted his employees to overcharge the government by $31,000 (Equivalent to roughly $500,000 today, assuming 4% inflation.) He also delivered over 2 million pounds of uninspected meat products that really angered the federal government. It has to be said that this did not lead to any recorded issues amongst the school children, but it quickly made the federal government move Adolph Gobel from being a “primary” supplier to merely an “emergency supplier.” As a result, by 1953 Adolph Gobel had gone bankrupt.

The only thing Tino had learned from this experience was that government programs were still an easy way to make money. So, He started the Allied Crude Vegetable Oil Refining company in 1955 to take advantage of yet another new government subsidized program: The U.S. Government’s Food for Peace program. This program was meant to sell surplus goods to Europe at a low cost in order to shore up the weak post-war economies. Tino Set up shop in a tank farm & seemingly had a legitimate business as he made deals with grain exporters and other agricultural companies. In truth, it seems that much of what Allied did was buy substandard shortening and vegetable oil at market cost on credit, and then sell this on to Europe with the US government covering the market cost of the goods plus a 10% markup. All Tino's company did was move goods around. By 1961, he had become a major food exporter to post-War Europe. In 1960, the Allied Crude Vegetable Oil Refining Corporation made close to $37 million, but it should be noted that given how Tino ran the business, this may be a massive understatement, as i speculate con men don’t like to pay taxes (Even when the profit was subsidized by the government in the first place).

By 1962, the operation was still running smoothly and Tino started thinking bigger. The allied crude vegetable oil company expanded into cotton, soybeans & other scraps that US companies did not want, but European companies needed. Tino had become a large enough player in the commodity markets that he thought he could corner, or control the soybean oil market with intent to manipulate its price and make even more money in the process. His plan was to use his large inventories of commodities as collateral to get loans from Wall Street banks and other financial institutions. Once he had cash in hand, he used it to buy up soybean oil futures and this would drive up the price of vegetable oil, which would increase both the value of his inventories and allow him to profit from his futures contract's rise in value.  

What is important to note is that these loans were being used not just to buy soybean futures, but also to pay for the day-to-day operations of Allied Vegetable Oil. From an investor standpoint, the alarm bells should be going off, as this was a clear sign not of a functional business, but a cash burning operation that would end quickly and painfully. 

The issue, though, was that Tino needed more and more money to help pay for his efforts to corner the market - so he promptly sought new investors. With the price soaring, larger companies were looking at the value of soybeans and deciding they must be a solid investment.

Tino was taking out loans to buy up soybean futures and in turn selling his prior purchased futures contracts now at a profit on the open market, before doing it again. And again. And in the Fall of 1961, Tino met with American Express and this marked when the real money arrived. 

As they should, American Express sent out inspectors to make sure that he had the vegetable oil before finalizing the loans. What is important to note is that Amex and other banks and brokers were not just taking Tino’s word for it. For every single transaction, someone would head over to the pristine Allied Vegetable Oil company and check the volume of the tanks. And, every single time, the measuring stick found oil, right to the bottom of the tank. However, it is immediately clear how Tino pulled this off: he simply added water to the tanks of oil. The water bulked up the volume and the thin oil layer floated on the top, as the measuring stick passes through the oil layer it coats the stick through movement, showing always a full measuring stick of oil. 

As time went by, Tino made more elaborate systems to cover up his lack of oil. In one case, he set up a series of pumps and pipes to move oil from one tank to another at high speeds. Tino would ask an inspector where they wanted to go and would then distract them long enough to shift the oil around. According to the NYT, even one month before his scheme was uncovered, nearly every single inspector found nothing to worry about with the operation.

But if these companies had truly done their homework, they would have realized that Tino’s reported vegetable oil “holdings” were actually greater than the inventories of the entire United States as reported by the Department of Agriculture. 

By now it should be obvious what was inevitably about to occur. Rumours had spread over time regarding Tino’s business practices and one of the 51 financial institutions showed up uninvited. Men arrived... and decided not to use a measuring stick, but a bucket. 

As the bucket fell in, inspectors saw the water swirl around and separate from the water. Checking two more tanks showed that all were almost full of water where there was supposed to be vegetable oil. 

On November 22, 1963, NYSE president G. Keith Funston attempted to avert a market crash as Ira Haupt's nearly 21,000 customers scrambled to sell their oil holdings before they became worthless. 

Because of all the trades the brokerage firm did on Tino's behalf, various banks were left holding the bag with over $37 million in unrecoverable loans. This rush, combined with the panic ensuing from the assasination of the President that afternoon, led to 2.6 million shares being sold and the Dow dropping 24 points (about 5%) in 27 minutes. The exchange was forced to close early to prevent further losses. 

The Allied Crude Vegetable Oil Refining Company filed for bankruptcy and Tino was sentenced to a seven-year jail term.

And If this story wasn't hectic enough, Warren Buffett caught word of this phenomenon and got involved because he recognized a certain ethos in the management of a company, of course paired with a discount to its intrinsic valuation. Buffett bought up American Express after the scandal was totally resolved and it was clear that they were going to survive. The stock was up off of its lows but still 30-40% below fair value. Buffett began buying shares and established a 5% stake in American Express for $20 million. American Express made a ten-fold move between 1964 to 1973 and he went on to acquire more of them throughout history. Berkshire currently owns roughly 16% of the whole company at the time of writing this. Now there's a deeper lesson to be learned here, while Buffett didn't buy right at the bottom, he bought at a time when the risk-adjusted returns were far better than when the stock was at the bottom, because more information was known and the scandal was resolved, and the stock was still absurdly cheap. This should be a great lesson for anyone who wishes to deploy capital into companies during distressed situations.

And for Tino, by 1972 he was released. By 1975 he was involved in another scam, this time a Ponzi scheme involving livestock in the Midwest. He used two slaughter houses named Rex Pork and Mister Pork, to defraud livestock dealers in Indianapolis out of $7 million worth of hogs (Inflation adjusted that's 50 million assuming 4%). 

He later was convicted and sent back to jail for an unknown amount of time.

In 1992, the F.B.I. Tino’s home for using $660,000 of forged letters to purchase more than $1 million of pork from a Canadian firm. 

He was convicted and sent to prison for the third time. 

Finally, on September 26th of 2009, Tino De Angelis passed away at the age of 93 years old. There was no funeral for him.

If you enjoyed this video, make sure to leave me a like or consider subscribing for more financial related content. As always, Thanks for watching and stay tuned for next week's video.