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But from 1995 through 1999, according to Value Line, EMC’s net profit margin slid from 19.0% to 17.4%, while its return on capital dropped from 26.8% to 21%. Although still highly profitable, EMC was already slipping. And in October 1999, EMC acquired Data General Corp., which added roughly $1.1 billion to EMC’s revenues that year. Simply by subtracting the extra revenues brought in from Data General, we can see that the volume of EMC’s existing businesses grew from $5.4 billion in 1998 to just $5.6 billion in 1999, a rise of only 3.6%. In other words, EMC’s true growth rate was almost nil—even in a year when the scare over the “Y2K” computer bug had led many companies to spend record amounts on new technology.3

A Simple Twist of Freight

Unlike EMC, Expeditors International hadn’t yet learned to levitate. Although the firm’s shares had risen 30% annually in the 1990s, much of that big gain had come at the very end, as the stock raced to a 109.1% return in 1999. The year before, Expeditors’ shares had gone up just 9.5%, trailing the S & P 500 index by more than 19 percentage points.

What about the business? Expeditors was growing expeditiously indeed: Since 1995, its revenues had risen at an average annual rate of 19.8%, nearly tripling over the period to finish 1999 at $1.4 billion. And earnings per share had grown by 25.8% annually, while dividends had risen at a 27% annual clip. Expeditors had no long-term debt, and its working capital had nearly doubled since 1995. According to Value Line, Expeditors’ book value per share had increased 129% and its return on capital had risen by more than one-third to 21%.

By any standard, Expeditors was a superb business. But the little freight-forwarding company, with its base in Seattle and much of its operations in Asia, was all-but-unknown on Wall Street. Only 32% of the shares were owned by institutional investors; in fact, Expeditors had only 8,500 shareholders. After doubling in 1999, the stock was priced at 39 times the net income Expeditors would earn for the year—no longer anywhere near cheap, but well below the vertiginous valuation of EMC.

The Promised Land?

By the end of 1999, Exodus Communications seemed to have taken its shareholders straight to the land of milk and honey. The stock soared 1,005.8% in 1999—enough to turn a $10,000 investment on January 1 into more than $110,000 by December 31. Wall Street’s leading Internet-stock analysts, including the hugely influential Henry Blodget of Merrill Lynch, were predicting that the stock would rise another 25% to 125% over the coming year.

And best of all, in the eyes of the online traders who gorged on Exodus’s gains, was the fact that the stock had split 2-for-1 three times during 1999. In a 2-for-1 stock split, a company doubles the number of its shares and halves their price—so a shareholder ends up owning twice as many shares, each priced at half the former level. What’s so great about that? Imagine that you handed me a dime, and I then gave you back two nickels and asked, “Don’t you feel richer now?” You would probably conclude either that I was an idiot, or that I had mistaken you for one. And yet, in 1999’s frenzy over dot-com stocks, online traders acted exactly as if two nickels were more valuable than one dime. In fact, just the news that a stock would be splitting 2-for-1 could instantly drive its shares up 20% or more.

Why? Because getting more shares makes people feel richer. Someone who bought 100 shares of Exodus in January watched them turn into 200 when the stock split in April; then those 200 turned into 400 in August; then the 400 became 800 in December. It was thrilling for these people to realize that they had gotten 700 more shares just for owning 100 in the first place. To them, that felt like “found money”—never mind that the price per share had been cut in half with each split.4 In December, 1999, one elated Exodus shareholder, who went by the handle “givemeadollar,” exulted on an online message board: “I’m going