William, to follow up.
I think in crazy times like these it pays to try to take a step back and take a look at the larger picture. That is what I am attempting to do. I am trying to take a more macro focus and not focus on a microcosm of which tech stock I have to jump on this week. I am trying to train myself to not feel like I have to have a trade going on every minute. It's ok to just sit there with your cash ready to pounce when an opportunity clearly presents itself to you. I have been guilty of moving from one trade to the next so many times in the past, and I think I see others doing the same thing.. Soon as one stock is sold another has to be immediately bought. It's ok to hold cash! It wasn't ok to hold cash in the last few years because stuff went up every day. That no longer applies. It pays to hoard your cash. Now, eventually you have to find a place to park your cash, and now that I'm not focusing on the next trade that I have to have going on, it leaves me more time to look at the bigger picture.
Now. How about that bigger picture? Well, we can glean a few important things from the past few years. One thing that is so crystal clear to all of us now is that all this talk about it's different this time is all poppycock. It's much easier to see this in hindsight. The shortest and simplest way to put it is: The business cycle has not been repealed! Let history be our guide. All the warning signs were plainly there for people to see, if they chose to see them. I mean there are some basic tenets that seem to work over time. What happened in 1987? The Fed was raising rates and the market was up big during the first half of the year. People ignored the rate hikes for a while because they were having so much fun. No wonder something had to give. Well what did we just witness? The stock market powering ahead in the face of 5 rates cuts before it finally cracked. The fed lowered rates to 3.5% heading into 1929, no wonder a bubble formed then as well. We don't have 10% margin rates like they did back then. We came up with something better. Derivatives. Even more leverage. Anyway it's obvious if you study past bull and bear markets that there seems to be major cycles every 20 years or so. Most people believe this bull market started in Aug of 1982. That puts it at 16 years if you believe the bear market started in 1998. (there were more stocks down than up in 1998, 1999, & 2000 and the market got very narrow). If you use Jan or March of 2000 then you could say the bull market lasted 18 years. That's about right. Major market cycles seem to go on for about 15-20 years at a time. Well let's look at some more history. What happened in the aftermath of 1929? Stocks never really regained their luster until World War II, about 15 years later. Japan is still over 60% off it's highs 12 years later. What happened in the aftermath of the '73-74 bear market? Well let's see. The Dow was flat for about 15 years. And don't give me some crap about how the Nasdaq did ok during that time. The Nasdaq wasn't a big deal back then. The Dow was a big deal, just like the Nasdaq is today. I don't see why everyone can't understand why that can happen again. How many people thought the Nasdaq would decline almost 70% in one year? None. How many thought it would go up 80% the year before? None. So obviously you can't just go by the conventional wisdom that it's different this time. "We're different than the Japanese". "We know how to fix these problems better than we did back then." If so, then why did we have to suffer all this carnage to begin with? If we are so much better at avoiding the pitfalls of market cycles before, how come we have a Nasdaq down 55%? The answer is simple. We can't avoid the pitfalls anymore than we could in the past. Human emotions and greed and fear will never go away and so we will always have a business cycle. All this talk about how the cycles are compressed is more hooey. Sure in a microcosmic sense there is lots of compression. But in a more macro sense we still have market cycles driven by fear and greed. That is never going away.
So you're asking yourself, what is my point I'm trying to get at? Well since nothing has seemed to change, and everything remains the same, I'm going to want to recognize and employ the proper strategy going forward when dealing with the aftermath of a bubble. The best way to do that is to let history by my guide.
What has history told us about bubbles before? Well one thing is for certain, and it happens with all bubbles. Everyone gets so caught up and enamored with the latest craze that they tend to under-focus on other areas. Obviously technology is the area that has been so over-invested in the last few years. What is the number one thing that has been under-invested in? Commodities/raw materials. Why would anyone want to build a new powerplant? You just have to hassle with government regulations and environmentalists. Why would you want to open a new mine? Metal prices have gone nowhere but down and the environmentalists hound the miners as well. If you did have the courage to open a new mine somehwere there's a likely chance that you are out of business now. Just look how many mining operations have gone defunct over the last several years. There is a small fraction of the viable mining companies out there today than there were just a few years ago. I'm not talking just in the the US or North America. I'm talking around the world, whether it be Australia, Africa or South America. Production has been in decline and there are much fewer players. Of course it's not just metals. It's oil & gas. The huge boom times have driven up the demand for petroleum products yet someone forgot to go find more. So we become more dependant on outside sources. Of course we probably could have found more here in our own backyard, but the environmentalists had something to say about that too. More regulations and laws kept oil exploration low. Man it has sucked to be in the coal business. Who the hell wanted to own a coal stock in the past 10 years? In the over 100,000 posts on the AMZN board, how many times was coal mentioned in the last few years? How many times was the word "internet" used? How about the word "tech"? Obviously not just us as investors ignored coal, oil & gas, and other natural resource stocks. Most EVERYONE did. That's exactly how they become so cheap. All the money is funneled into whatever the latest craze is--and everything else suffers from underinvestment. Now I could go on and on about how things likes hogs and coffee and wheat and stuff like that has been underinvested in, but I'm not much of an authority on that (YET) so I better not try to talk about what I do not know. But you don't have to be a brain surgeon to know that it was cool to open an internet or software company in the last few years but not cool to be a farmer. It wasn't cool to start a sugar plantation. It wasn't all that profitable to grow tea or coffee. So that stuff has been ignored. It's been ignored because prices have been steadily falling for 20 years. Why have prices been declining for 20 years? Because there was a bubble 20 years ago! Not a stock bubble, but a commodities boom! Yes you remember, back in the 70's oil skyrocketed, and by 1980 silver shot to $50 an ounce and gold hit $850. These are the obvious ones that everyone remembers, but all commodities were booming in the 70's. Why did the bubble start in the first place? Well, you can try to argue that there were many different sets of circumstances back then like the artificially set price of gold, or a couple of guys trying to corner the silver market, or things like that. But all commodities boomed, and to just cut to the chase, in the aftermath of another stock bubble peaking in the late 60's people FLED paper assets and flocked to hard assets. Here, let me back up a bit. It's easier to start from the beginning. Let's start by leading into 1929. Now the CRB index for commodities wasn't created until 1957, so you can only look at a chart from then until now. But what some people have done, (I read this on a website somewhere and I will try to find it) is to take the 17 major components of the CRB index and go back and see what they traded at during the 20's. They did all the calculations and then of course adjusted the whole chart to account for inflation. I found the GIF file on my puter and am looking at the chart, I have to track down the article. The "CRB" starts with a value of 1 in 1921. By about 1925 it had risen to almost 1.5, but then it slid steeply all the way down to about 0.75, meaning a drop of about 45-50% off the highs. That seems logical, stock prices were flying so why would anyone want to spend money on commodities? Paper assets were king. About say 2-3 years after the crash (I would say enough time for a bounce and some time for people to discover that the market wasn't going to come back), their is a clear V bottom, and the "CRB" ran from a value of about 0.75 to 1.80 for the next 18 years right up until 1950. It had a pullback for a couple years or so then made a double top in the early fifties and started a new bear market. Of course the bear market went that started in the early fifities pretty much coincided with stocks which did well in the 50's/. Once again, a shift away from commodities and back to paper assets. Well of course the CRB made another V bottom around 1970, once again about 2-3 years after the market topped and people switched out of paper assets. Or course you all remember the commodities boom of the 70's. It topped out around 1980 with silver at $50 and gold at $850. This run in commodities did last only about 10 years (1970-1980), but it was quite sharp and took the CRB to a value of about 2.25, eclipsing the high of the 1950's. Of course commodities slid for about 20 years going into 2000, so the cycle seems pretty well intact. The chart shows the value of the CRB as of 2000 at the same level it was in 1932 or so in the aftermath of the great crash. About 0.75. So essentially the chart is saying that the CRB in inflation adjusted terms is at an 80 year low, after a vicious slide for the last 20 years. Makes sense to me, the top in 1980 was a big bubble, and the bigger they are the harder they fall. Not only that, but this stock market bubble for the last 18 years was the biggest around, so it's only natural to assume that commodities would have to take the brunt. Even though commodities were in a 20 year bear market from the early 50's until 1970, it was only about a 40% decline from top to bottom. But that's understandable, paper assets (stocks) weren't as crazy during the 50's as they were during the 20's and the 90's The top in 1980 was 2.25 and going into 2000 it sat at 0.75 or so, so this 20 year bear for commodities is quite deep, about a 66% decline.
Sorry for all the rambling, but are you starting to see a pattern here William? Commodities slid during the bubble of the 20's and for a couple of years in the early 30's in the aftermath of the crash. Then they went on a huge bull run, of almost exactly 20 years. Of course stocks weren't very good during most of this time, they didn't start picking up again until WWII. People favored paper assets during the 20's and commodities suffered. Then after the crash, for 20 years they were wary of paper assets and commodities had it's bull run. In the early fifties stocks started generating good returns again and it was time for the commodities to suffer. This bear for commodities lasted just under 20 years, heading into 1970. Of course by 1970 it was time to flee stocks and paper assets and switch back into commodities. The run on commodities starting about 1970 looks like it only ran about 11-12 years or so (hard to discern from chart), so that bull market was shorter in length than the bull run of the 30's and 40's, but it was sharper, doubling in 10 years while in the first half of the 20 year run after the crash it had gained only about 65%-70%. What happened when commodities peaked in the early 80's? We started a new bull run for stocks (paper assets), and I think you know where we've headed from there. Commodities have gone straight down for 20 years and stocks have gone straight up.
Of course I'm sure I'm going to get a lot of people saying, "yeah, but it's different this time!!" They will come up with all sorts of reasons why commodities won't start a new bull run (in fact they already started a couple of years ago), but their precious stocks will comeback.
It only seems logical to me Bill that the smart people who are going to make the big money going forward are the ones who recognize that the party for stocks and paper assets is over. I know it's hard to believe, because they've done so well over the last 20 years. But how many threads are there on SI to talk about commodities? How much time does CNBC spend each day devoted to talking about commodities? What kind of responses would get from people at parties if you told them to quit buying stocks and to buy hogs, coffee, sugar, or....even gold? You would either get laughed at or receive a blank stare. People still won't give up on their stocks. We all still have to hear about CSCO and JDSU, CIEN, and JNPR, and such.
Funny, hardly anyone was talking about buying oil or gas the last couple of years. Not too many people were paying attention to platinum & palladium. No one even thought to utter a word about coal, and now u have coal IPO's surging like internet IPO's!! Gold & silver? Fuggedabout it! Buffett bought 20% of the worlds supply in silver. Hmm...he's been known to be early, but he is also known for spotting value.
Now I know I have been going on about gold lately, but that doesn't mean it is going to be THE commodity play for the next 10 years. It just happens to look to go higher in the coming months. (it's overbought near-term but it's working that off the last couple days). Gold did participate in the last two bull runs, just look at what Homestake Mining did in the 30's and 40's. From 50 to 500 excluding dividends. Add in healthy dividends (a relic) and it was up many more fold. Interestingly enough it didn't move up much until a couple years after the crash, and funny the same thing is happening to gold now. Same deal for the 70's although the government did artificially hold gold low until the standard was abandoned in 1974 I believe. The market topped out via breadth in 1998 and the the averages topped out in early 2000, and what do you know gold is going up right on schedule.
Bill, if you were to force me to pick one or the other, a basket of gold stocks or a basket of stocks like CIEN, JNPR, BRCS, BEAS, EBAY, etc and I had to hold them for the next 10 years, I can honestly say that I would choose the gold stocks. I know that seems ridiculous considering how tech stocks have performed vs gold in the last several years, but I don't think anyone expected the market to go as parabolic as they did. I don't think anyone expected the Nasdaq to drop 70% in one year either! I don't think anyone will see the turn in gold and many other commodities coming either.
It more than likely will be some other sort of commodity that takes hold, maybe "black gold"? Maybe water, who knows. But I bet the next great investment opportunity for the coming decade will be a raw material or natural resource. Not just one mind you, but a lot of different ones. I have only done some research on the metals so far, so I can't tell you what other commodities to keep an eye on. But you can bet I'm going to find out!
Here is another stock I think would be ok to buy and hold
quote.yahoo.com |
