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Why Warren Buffett’s 1999 Warning Still Applies Today

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Warren Buffett arrived in Sun Valley, Idaho, with an unpopular warning — one the visionaries in the room were in no mood to hear.

The tech leaders gathered there were bent on changing the world and had already made fortunes doing it.

And in a year where some tech stocks were surging as much as 27-fold, many were sitting on investments with sky-high valuations that they felt just fine about.

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There were polite nods as Buffett took his place behind the lectern.

Buffett warned the crowd that they were expecting too much in the long term. He pointed out some periods in recent U.S. history where America’s economy had doubled, tripled or even quintupled in value — yet the stock market went nowhere because it had already been so overpriced to begin with.

Buffett acknowledged the white-hot performance of the market in recent years. But this should make investors cautious. Over time, he warned, reality would catch up to lofty valuations.

Buffett was right to preach caution in late 1999. The infamous collapse of the dot.com bubble — one that would send the Nasdaq Stock Market plunging as much as 75% and see household names like Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN) shed over 80% of their market capitalizations — was just a few months away.

Buffett’s friend Microsoft Corp. (NASDAQ: MSFT) CEO Bill Gates was in the audience that day. In less than a year, the share price of Microsoft would plunge 34%, and it would take 14 years for the company’s shares to return to their 1999 levels.

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Andy Grove, founder of Intel Corp. (NASDAQ: INTC), was also in the crowd. He would see his company do even worse. Intel returned 24% over the next 17 years, just half of the S&P 500’s 58% gain.

Is History Repeating Itself?

Almost two years ago, Charlie Munger, Buffett’s partner at Berkshire Hathaway Inc. (NYSE: BRK-A), made his own warning of a dangerous market mania, saying investors were “very near the edge of playing with fire.”

The stock market’s turn over the last year has validated that view. The S&P 500 has plunged over 22%, ending a historic 14-year bull market. And in nosedives similar to what tech suffered in 2000 and 2001, tech giants like Tesla Inc. (NASDAQ: TSLA), Apple, Amazon and Meta Platforms Inc. (NASDAQ: META) have shed trillions of dollars in market value between them.

And it’s not just publicly traded companies — funding for startups has collapsed 23% globally over the last year. Clearly, there’s been a turn in market sentiment.

Investors are no longer euphoric and driven by fear of missing out. Now they’re rattled after almost a yearlong market downturn. And this calls to mind more words of wisdom from Buffett: be greedy when others are fearful.

It’s worth noting that the tech stocks hurt most in the last great tech selloff rebounded by over 2,000% each in the years ahead. It’s possible investors today are faced with a similar opportunity.

And investors looking to profit from an eventual rebound have a weapon in their arsenal they didn’t have in 2001 — easy access to new startup companies through equity crowdfunding.

StartEngine is an equity crowdfunding giant that allows regular investors to claim stakes in some of the most exciting, if risky, companies in the world. It recently inked a deal with another crowdfunder — Indiegogo — to bring the latter’s network of 800,000 investors to StartEngine’s equity crowdfunding platform.

The deal brings StartEngine’s reach to 1.7 million investors — and the string of acquisitions may just be beginning.

See more on startup investing from Benzinga.

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Photo: Courtesy of Fortune Live Media on Flickr

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