Were internet related companies at the height of the dot-com bubble really overvalued from a long term persepective?

External question — Quantitative Finance Stack Exchange Author: Kvothe Original post: https://quant.stackexchange.com/questions/85287 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. TL DR: What was the long-term return of the original Dow Jones Internet Composite Index constituents (no rebalancing but reinvesting dividends) from 1999/2000 to today? This question is motivated by wanting to better understand the dot-com bubble. The expectation around the time was that the internet would be a huge thing resulting in great returns. From the long term point of view this expectation of course turned out to be exactly right. Internet/tech companies indeed showed some of the greatest returns in the times to come. Yet there was a "bubble" that burst and afterwards the perception was that these stocks had been overvalued. There seems to be somewhat of a contradiction in this that I want to understand better. Were these stocks really overvalued (on average/as a whole) when we take the long term perspective or were the valuations at the height of these bubbles actually accurate in the long term? In turn I want to understand this because the Dot-Com bubble appears very similar to a possible "AI stock bubble". AI is another area where I feel very confident that it will be the most important growth sector in times to come. Yet there might still be some "bubble bursting" before those stocks pay of. I want to better understand how "bad" it is in such a case to invest pre- "bubble burst" from a long-term perspective. Something that I think would give insight into this question is: What would the long-term total return have been for a portfolio consisting of the original constituents of the Dow Jones Internet Composite Index at a fixed date before the dot-com crash (e.g. Feb 1999, June 1999, or Jan 2000). Some slightly complex things that would need to be considered to come to something that can fairly be compared against the performance of other indices. We should probably consider all dividends to be reinvested proportional to the holdings in that year. Delisted and bankrupt companies need to be properly taken into account (as total loss?) Would someone here know how to answer this question?

External answer — Quantitative Finance Stack Exchange Author: AMach Original post: https://quant.stackexchange.com/a/85293 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. There likely was an actual bubble. Just because a lot of these companies turned out to be massively profitable and established deep moats doesn't mean that was at all likely to have been the case back in 2000. Bubble basically means current valuations and future expectations were way too high given all the knowable information at the time and that became immediately apparent when we entered a multi year bear market following a dramatic crash.