It's instructive to have a look back at the internet bubble and 1999. I am not arguing that we are in 1999 because there are substantial differences between the two. Nonetheless I find a comparison to be instructive.
A number of articles in 2015 (when Nasdaq finally overtook its then all time high) compared 1999 to 2015. Here are some interesting stats that I recall from reading them.
Only 4 of the 15 top Nasdaq stocks were still in the top tier 15 years later. The rest had either disappeared or had lost so much market cap that they were no longer part of Nasdaq 100 :-O. Of those 4, INTC, CSCO, QCOM (I can't remember the last one but it may have been DELL), only QCOM had a positive, albeit meager returns. The rest were still under water.
A lot of the high flyers are just not around anymore or are barely a shadow of their former self. Off the top of my head I can think of Sun Micro, Yahoo, Veritas, EMC, CMGI? etc, etc. Even those that have survived, such as Intel, Cisco, Micron, etc never regained their former highs (not even today).
But there are substantial differences between then and now. For starters the market is not as frothy now as it was back then. The number of IPOs today (or even last year) is about half the number of IPOs at the peak (maybe about 2/3, I'm speaking form memory - the point is that the difference is substantial). Ditto for the size of the IPOs. They were a lot bigger back then - especially in constant dollar terms and relative to their revenue.
My takeaway from my readings was this:
(1) Passive long term buy and hold is a myth. Looking at the top stocks of 1999, even the quality ones that have survived to today should tell you that. But buying an index fund (or simulating one, if you can) is a good idea. The Indexes are not really passive representations of the market. They are rebalanced every year. If you want to try your hand at a long term "buy and hold" at least do what the index managers do and follow a similar criteria.
(2) Don't fall in love with your stocks and know when to quit (and not average down). On the way up, everything looks great and there is no reason to believe that the stock is not going to grow into its valuation - that is why it gets to get that high. For example we all knew that ecommerce was going to take the world by the storm and that everything from supply chains to travel and bookings will be done over the Internet. And it did happen. But it did not happen the way people thought that it would; eBay did not take over the world and neither did most etailers of that era. Sun Microsystem didn't survive to be the main supplier of servers to the Internet. Dell's margins shrank big time. Yahoo did not remain the main search engine. Memory demands kept growing, but Micron's market cap did not.
(3) Being too clever is not a good thing. When there are a lot of clever people out there and when something is that obvious to you, chances are it is reflected in the price. If making money is easy, it is because you are unaware of the risk premiums built into the stock. If you are damn good trader, then your stoploss sells might save you. Otherwise, you have two sure ways to win (see below).
(4) The number one way to win is to choose a time horizon that is incompatible with most of Wall St. 2-years is a good number. It is short enough to allow some visibility, and long enough to keep you on the safe side. If the stock needs more than that to grow into its valuation (and you know this b/c the marketing lit will say something like this market segment is expected to grow into XXXX over the next 5+ years) then it is too risky.
(5) The second way you win is via diversification - but not as it is normally understood. Diversify between value (as I discussed in my other post) and growth (as measured by margin expansion rather than EPS). This will may keep you out of the hottest stocks, but it will let you sleep at night ;) |
