In the history of financial bubbles, the latest one naturally looms largest. It is the Internet bubble, which burst in the spring of 2000, and precipitated the steepest bear market in technology stocks since 1973-74. The Nasdaq composite index, which peaked at 5048 on March 10, by late November had plunged to below 2600, a staggering decline of nearly 50%.

"Why would the market value an Internet stock with a few hundred people more highly than DuPont? None of it made any sense," says Sheldon Jacobs, editor of the No-Load Fund Investor newsletter. The World Wide Web is indeed one of the revolutionary technologies of all time, he says, "but you can't divorce it from investing fundamentals. History is very clear: When new industries are created, thousands of companies are launched, but ultimately only a handful remain."

Certainly, the Internet bubble invites comparison with the great financial follies of legend. Fortunes were made on the illusion of windfall profits and lost when they didn't materialize. But to declare technology dead, as the market did in 2000, as if it were tulip bulbs in the 17th century or the South Sea Trading Co.'s imagined shipping rights in the 18th, is to profoundly misunderstand that at the heart of this craze was a sound idea that, indeed, remains unchallenged.

"Is this a South Sea bubble? I think the answer to that is, 'Not at all,'" says Jim Griffin, investment strategist with Aeltus Investment Management in Hartford, Conn. "Dotcoms got carried out and shot, but the rest of it was really a matter of a tide floating some very seaworthy boats."

What pricked this bubble was a growing realization last spring that the dotcom paradigm-spend massively to create "first-mover" advantage, and then wait for the dollars to come rolling in-was fiction. What exacerbated the crash, however, was fact: Technology profits were heading for the gutter. In part, this was a cyclical downturn of the sort this highly volatile sector experiences every year or two. In part, it was a secular shift from older technologies like PCs to newer ones like Palms.

But in no part, say technology's bulls-who remain the richest investors on Wall Street, even after the crash-was it a fundamental secular shift away from technology and toward something else. Jim Oelschlager, who has been uncannily detecting such seismic shifts for decades, says the tech foundation is intact.

"For most of my 30 years, I've not been in the tech arena," he says, "but we think that's the place to be for now, and for some time to come. The productivity gains of this Industrial Revolution are being driven by technology."

The Scarlet Letter

The rise in the Nasdaq last winter created more than $2 trillion in wealth; the collapse erased $3 trillion.

"On a purely financial basis, I think it's clear this has been one of the greatest booms and busts ever; much bigger than biotech, or personal computers when they first came out, or real estate, or junk bonds," says Jordan Goodman, author of Everyone's Money Book (Dearborn Financial Publishing, Second edition, 1998, $26.95).

The real rocket ship was, of course, the Internet. "You've got selling books for 50% of retail, stock trading is practically free, industrial suppliers and their customers deal online, and tons of stuff on the Internet is free," Goodman says. "This is the entire economy-e-commerce, education, how to deal with kids, pornography, everything. I think it does have the potential to transform the economy, but what people didn't ask is, 'How do you make money from this stuff?'"

Seth Kirkham, the London-based co-manager of Guinness Flight Wireless World Fund, says it was an article in Barron's magazine, asking exactly this question, which pricked the Internet bubble. "I remember reading that article about the cash-burn rate of dotcoms back in March or April," he says. "It hit everybody pretty hard."

Burn rate-the word is rarely heard these days, but New York Magazine columnist Michael Wolff used it as the title of his book on Internet mania in 1999-is the cash dotcoms were spending but not earning. It came from investors: venture capitalists at first, like Paul Allen's Vulcan Ventures, but then from the public.

In the beat of a heart, a company's burn rate was transformed from a badge of honor to a scarlet letter. Well-financed but ill-considered companies like began to run dry. founder Jay Walker's stake in the name-your-own-price service, worth more than $6 billion at its peak, burned down to $130 million in November. At least 130 dotcoms folded in the second half of the year.

The sudden evaporation of this instant wealth-though it returned Nasdaq to little below where it had been one year earlier-had profound consequences, especially on those directly involved. "The psychological bust has almost been bigger than the financial one," Goodman says. "People started spending money they didn't have. People were leaving established blue-chip companies to join startups on the prospect of gargantuan stock profits, and it didn't work out that way."

But outside the dotcom world, says Kirkham, the downdraft swept away the good with the bad. "Nasdaq's decline has hit companies all over the world-there's no doubt of that," he says. "And yes, we have seen some cyclicality in the earnings of technology companies like Nortel [Networks] and Intel. But I still firmly believe that technology is driving the economy, and by investing in technology, you are getting the opportunity to get super-normal returns from equity investments."

Enthusiasm Remains

Oelschlager endured the bear market of the 1970s as the pension chief of Firestone Tire & Rubber Co., distinguishing himself because he ignored the Nifty Fifty-the high-tech giants of that era-for boring, but successful, stocks like Union Carbide and Ford Motor Co.

He set up his own firm in 1985, first managing private accounts and, in the 1990s, opening a series of mutual funds. Oak Associates manages $30 billion in concentrated portfolios that are constructed by choosing the dominant companies in the fastest-growing industries. Some $9 billion of those assets are in the funds -White Oak Growth Stock, Pin Oak Aggressive Stock and Red Oak Technology Select.

The latter two, as well as a small-cap fund called Black Oak Emerging Technology, which was set to launch at the end of December, invest strictly in tech. White Oak has half its assets in that sector, with the other half divided between financial services and health care.

Oak's funds are each among the best of their categories, and they are driven entirely by stock picking. Oelschlager doesn't shrink from making big bets. At the end of September, according to Oak's SEC filings, nearly $5 billion of Oak's assets were invested in a single stock: Cisco Systems. Indeed, the relatively small boutique is the seventh-largest investment-company shareholder of Cisco, just behind Fidelity Investments, Janus and Vanguard Group, with 1.3% of its common.

The firm's top 10 names, including EMC Corp., Brocade Communication Systems and Applied Materials, accounted for 50% of assets.

His enthusiasm for technology "wasn't a one-day event," he says. "We just started seeing more opportunities in the technology area, so we began buying it here and there, and it was 10% of our portfolio, and then 20%, and 30%, and 40%, and so on. We didn't go the whole way in one day."

He remains enthusiastic because, despite the premium tech stocks demanded before and after the crash, he thinks they're worth it. The Nifty Fifty, he notes, "traded for 100 times earnings, but their earnings' growth rate was 13% or 14%. Today, with the same kind of multiple valuations, good companies are growing 40% or 50%. The world never knew companies like that before."

Another top-tier tech investor, Amerindo Investment Advisors, follows the same top-down, concentrated approach, and it leads in the same tech-centric direction. The company's flagship mutual fund, Amerindo Technology, shot up an astonishing 249% in 1999, after surging 85% the year before. In 2000, through Oct. 31, it was down 39.1%

"This is not a unique period in the market," says Michael Sandifer, a member of the firm's investment committee. "We go through, periodically, these cycles of celebrating an awful lot of good news and then ignoring good news for a period of time."

Wrenching Transition

The good news to which he refers is the fundamental strength of technology in supporting the kind of productivity surge that is the hallmark of today's global economy. "We have been doing emerging-technology investing as a firm for more than 20 years now, and we have never seen the rate of change from a technology perspective that we are going through right now, which in our view will drive investment returns over the next three to five years in a most positive pattern," Sandifer says.

In Amerindo's view-with which Oelschlager and a number of other tech investors agree-high technology is undergoing the third massive wave of change of its brief life. The first wave, 20 years ago, was centered on mainframe computers. IBM was king. The second, a decade later, saw processing power moved from mainframes to desktops-the client/server model, which pushed companies like Microsoft and Intel into the ranks of the world's biggest, most powerful companies.

The third wave is the Internet. "This is where the intelligence will reside," Sandifer says. "Many applications now on computers will be out there in ether space for you to utilize as you need them." Furthermore, he says, "With the Internet, you combine communications and e-commerce, and the next five years, as a consequence, will see the greatest rate of economic change driven by technology that we've ever seen."

Amerindo's biggest investments are in names both familiar and obscure. It has big positions in eBay Inc., the leading online auctioneer, and, the biggest online bookstore. It also owns the companies Sandifer says "will be household names three years from now," such as Ariba Inc., maker of Web-based procurement software for corporations, and Inc., whose Web site lists more than a million houses for sale.

Nevertheless, the transition from PC to Internet computing can be wrenching. Gateway Corp. tumbled more than 50% in 2000 as it failed to meet Wall Street's earnings expectations. The slowdown in sales of personal computers also whacked even better-known names, such as Dell Computer and Compaq Computer.

Cascading Concerns

The transition doesn't necessarily hurt tech investors who are nimble enough to discern this trend and escape it. In 2000's second quarter, Oelschlager slashed his positions in all three PC merchants, and all but eliminated them in the third quarter, when they began to crumble.

But trends can take funny twists, and one such unanticipated wrinkle all but wrecked technology's twin-telecommunications-in 2000.

Since the Bell System was broken up in the 1980s, telecom has been the market's darling. The Telecommunications Act of 1996, which extended deregulation to local service, only improved its rosy outlook. Seligman Communications & Information Fund was one of the stars of the 1990s, returning an average of 30.7% in each of those 10 years-more than 50% above the market's return.

The year 2000 began amid this buoyant spirit. Telecommunications service revenues are growing at 10% annually. Data communications traffic doubles every three to four months. Internet acceptance has become so widespread that the electric power industry estimates 13% of national consumption can be traced to it.

But as the year wore on, telecom providers began to report weaker and weaker earnings. AT&T, the industry's standard bearer, says its long distance business is in "systemic decline," and its chief executive wants to break the company up to unleash its faster-growing segments, such as cable and wireless. WorldCom says revenue growth is slowing to single- from double-digit levels.

Investors also began to realize that competitive local exchange carriers, or CLECs, the biggest beneficiaries of the 1996 act, weren't drawing customers at a significant rate. XO Communications, which supplements local-exchange services with high-speed Internet access and other high-tech baubles, sank to $15 from $66. Shares of Teligent, which does the same thing wirelessly, free-fell to little more than $1, from $100.

Problems at the carriers quickly spread to their suppliers, notably Lucent Technologies. The AT&T spinoff makes more telecommunications equipment than any other domestic company, but Ma Bell remains one of its most important, and least successful, customers. As it revealed softer and softer revenue numbers, the stock sank from nearly $80 as the year began to less than $20 as it approached its close.

Lucent and its rivals in turn are major customers for a whole other tier of technology companies, notably Cisco. They buy components from the next tier down, and so on. The cascading concern amplified and reinforced the tech decline, and tanked the tech-heavy Nasdaq.

Slump, No Crash

The cascade was itself self-reinforcing, as major market moves always are. "You don't want to encourage anyone to grab falling knives," says Aeltus' Griffin.

But Griffin remains a long-term bull on the sector. "South Sea was a pig in a poke," he says. "Here you're buying optical switches and chips and software. You're not buying a distant dream." Over the next five years, he says, he expects the sector to outperform the market, as it has over the last five.

NewBridge Partners is a Manhattan investment boutique that, in the words of its director of research, Erick Maronak, is "looking for the best, most dynamic companies in the best industries as defined by growth and addressable market size." It finds them in technology stocks like Cisco and EMC Corp.

"The negative sentiment now actually reflects a lot of known information," he says, citing interest rate hikes in 1999 and 2000, the surge in oil prices from $10 a barrel to more than $30, political unrest in the Middle East and what he delicately calls "our own political drama here in the United States."

"But I don't think the outlook has changed in any significant way," he concludes. Anyone with a three- to five-year perspective should remain sanguine. "Having always been big investors in technology," he says, "we're not surprised by the periodic slumps."

Slump. Sure sounds better than crash. And it might be more accurate.

Timothy Middleton is mutual funds columnist for Microsoft Investor and market analyst for Edgar Online.