Financial analysts take stock after dotcom crash

Dotcom entrepreneurs have to reflect on how to manage the future Keystone

It's a little over a year since the dotcom bubble burst leaving many firms facing bankruptcy and many investors with their fingers burnt. It also left financial analysts, including some in Switzerland, reflecting on their role in the crash.

Internet mania struck the financial markets in the late 1990s as the dotcom sector became viewed as the goose that laid the golden egg. But the correction that began towards the end of 2000 saw thousands of virtual businesses bite the dust and others lose much of their stock market value overnight.

Many dotcom entrepreneurs and investors now look back red faced, feeling they were taken in by the latest market fad.

Another group of professionals embarrassed by the boom-and-bust trend are financial analysts. Many of them vastly overestimated the earnings potential of new economy companies.

Serge Ledermann, the president of the Swiss society of financial analysts and portfolio managers, says there were too many players and their business models were not always solid. But he admits that many financial analysts were taken in.

“I think the industry as a whole remained too optimistic for far too long about stock markets globally and especially tech-related areas,” he says. “It was all about fashion and momentum and some financial analysts were not critical enough in calming the euphoria.”

The shake-out of the dotcom sector has resulted in a far more realistic view of what the internet revolution can achieve. Instead of searching for the next big thing, the industry is now considering how existing internet technologies can improve efficiency for all businesses. The mantra now is less about replacing the old economy but complementing and improving it.

For financial analysts it means going back to the basics in evaluating companies and assessing their earnings potential in a much more down to earth way. To do that, Ledermann says analysts have to be more impartial.

“We should have an appropriate platform and the appropriate tools so that analysts can be totally independent,” he says. “This is often the case but not always and one of the main tasks of our association in the coming months and year is to make sure that analysts in Switzerland have the platform to do a top job with total independence.”

It’s rare for a profession to be so self-critical and undertake such a radical re-think of its relationship with another group, but it seems financial analysts have been severely shaken by their role in fuelling the hysteria in the hi-tech sector.

While dotcom entrepreneurs are reassessing their relationship with the old economy, financial analysts are now also looking at their links to the financial markets.

by Michael Hollingdale