Cary,
A few general comments/questions on some of your subpoints:
You have to admit that the limited definition, the either or bear type, is a classic example of "generals fighting the last war!"
It is merely a statement of historical fact that for the past century secular and cyclical bear markets have tended to have an average duration of 16 years and 16 months respectively. I do not have the variance numbers but it doesn't seem great from what I can gather.
We are in the aftermath of a technology bubble.
No doubt about it. Bubbles are nasty things, which I guess is one of the things that makes AG's job so difficult. One of the nasty things about them is that they tend to produce that nasty type of longterm bear market to digest those oversized gains from 1982 to 2000. Remember AMAT was selling for $0.10 a share and the Dow Jones Industrial Average was at 775 back in 1982. Who says AMAT can't go to $5 or the Dow to 5,000, at least temporarily? It would still be a 50 fold gain for AMAT and a 6.5 fold gain for the Dow during the generation. Seems about right, doesn't it? <g>
It wasn't long ago that the word secular never arose on these threads except in the context of "secular growth rates". Now we are struggling with trying to understand a new and more depressing context for this word. In French the term for century is "siecle", so secular literally means once a century.
The world has never had one like this.
I'm not so certain about this. While history never repeats, it does tend to rhyme. I'll be happy to lend you my copy of Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds. The first three chapters: (1) Money Mania - The Mississippi Scheme; (2) The South Sea Bubble; and (3) The Tulipmania are the principle ones that deal with money and deserve to be read by every investor.
What is technology but the practical application of science to commerce and industry? Many of the "Bubble-Companies" listed by Mackay deal with technology of one sort or another, e.g. for carrying on and improving the British alum works, for encouraging the breed of horses in England, for improving the art of making soap, for improving the wrought-iron and steel manufactures of this kingdom. Then there were the less probable type: for extracting silver from lead; for the transmutation of quicksilver into a malleable fine metal. And finally Tulipmania, the breeding of beautiful and scarce flowers. Mackay tells us that in Scotland the highest price for a species of Tulip was ten guineas towards the close of the seventeenth century and "their value appears to have diminished from that time till the year 1769". These mania are not remarkable. They are about supply and demand and technology and vanity and greed for short term gains. They can last a generation or more and it can take that length of time for them to fully unravel.
Was this tech bubble really so different from the automobile boom of our parents generation, or the railway and canal booms of their parents day? Each was brought about by technology which was extremely useful, required large sums of capital, and brought forth a supply of investors and speculators who readily supplied it until overcapacity was reached and cheaper substitutes were developed. Aren't the bubbles they brought forth in a perpetual state of unraveling, long after the dinosaurs have become extinct and the weakest gone under. The survivors have long ago reached maturity and have survived the initial deluge of competition only to face the even greater threat of sluggish end user demand.
16 months is obviously too short.
Agreed.
The destruction of technology companies and the obsolescence of the erroneously built technology infrastructure will not take 16 years.
The 16 year average duration for secular bear markets has less to do with technology than business cycles. I agree that Silicon Valley operates at warp speed and that a time of scientific progress should be one of intense competition and volatile competitive advantage, unless monopolies are encouraged whether by fiat (patent) or some other means. And I think that even those few tech companies that are genuine innovators and have withstood the test of time periodically experience bouts of volatility that cause even their longterm holders to have their doubts. (I am thinking about LU and GLW here. <g>) In the world of semiconductor capital equipment that you are most familiar with, the cycles have certainly been swift and sharp. But we are not talking about cycles here, but rather of events that are by definition, once an age, a generation, or a century. Can anyone really argue that the rise in AMAT from 5 to 50 in 18 short months from 1998 to 2000 could have been sustainable? A great company to be sure. It has always been volatile while displaying a high alpha commensurate with its rapid secular growth rate, to use that more familiar phrase once more.
When we see such rapid turnover as we witnessed in the shares of internet, telecom and tech companies, where at times and for days on end 10% or more of the entire float traded in a single day, it suggests more an urge to play games with volatile financial instruments than to invest in the longterm promise of technology. In a sense it has more to do with the innovation and declining costs of online trading itself than the IP that is employed by the company. One of the economic costs of increased trading efficiency may be an unfortunate increase in the propensity to gamble. That propensity naturally rises during times of rising prices and falls at other times.
I agree with you Cary that the operative lesson from this bear market is not to just abandon the market entirely until the signs of mania reappear. I have noticed that in the midst of the last secular bear market, from 2/20/78 to 11/16/80 AMAT rose a remarkable 1570% while the Dow Jones Industrial Average rose 25%, GM declined 14% and AT&T declined 18%. I was unfortunately just completing my undergraduate education at the time and didn't follow AMAT. Any old timers fortunate enough to hold AMAT shares during that period can perhaps give me their recollection or perhaps justification. Probably had to do with the almost 90% decline in AMAT from 10/6/73 to 12/20/74 followed by a 38 month stretch in which it just tracked the Dow to a modest 20% gain. In the 13.5 month period following the remarkable gain, AMAT lost almost half its value, compared to a loss in the Dow of 12%. By then it was 1982. The Dow stood at 850, AMAT was at 11 cents and the rest is history.
Selectivity is certainly the watchword. You are quite right that one is not truly investing if one is not happy to see share prices falling in order to commit more cash at bargain levels. This of course counteracts an almost instinctive tendency to seek and value things that are scarce, as represented by the competition to get them at higher and higher prices.
Sam |
