Shane, good question. Unfortunately, there are no satisfactory answers for some of the questions.
1. Each bubble bursts at a different rate of speed. The overpricing in 1987 was corrected to almost fair price in about two weeks. In 1929, it took several years to hit the bottom. With energy, it took a long time to unwind. With silver, it was overnight when the Hunts got cheated by the govt. In Japan, it took nearly a decade. So, there is no way to know.
2. In most bubbles, there is a core of premier holdings that remain inflated after the smaller stocks or commodity contracts have already crashed. 1974 was the great example of this. Small stocks had died in 1969, but a handful of fluff called the Nifty Fifty kept moving up. So, when the bubble burst, some folks say that small stocks did better, though that was not good. However, I would say that their part of the bubble just burst earlier. In general, small stocks are more vulnerable and the larger stocks represent cos. likely to survive most scenarios. There is a flight to safety and the list of winners continuously gets narrower. When they pop, the big stocks often do not do as poorly as the small ones. However, the small ones tend to come back first, as it only takes an order or two to move some of them.
3. Again, it depends. The energy crash took down the entire market. The biotech crash did not. Part of it has to do with the size of the bubble sector and the valuations of the rest of the market. For example, back in 1992-1994, I was still buying tech stocks while dumping biotechs and even buying puts on or shorting some. Biotechs were priced at silly levels, but the rest of the market was kind of cheap, especially the techs, which were priced at multiples lower than the S&P 500. At this bubble level, the internuts are silly, but the multiple of the entire market is nutso. I think the internut bubble popping would be more likely than not to take down the entire market.
4. The biotech bubble lasted quite a while. I remember buying Genentech, the first bio co. to go public, back in 1981. There was certainly no bubble then. But after the 1987 crash, and especially after the 1989 sell off in tech stocks, folks started looking for cos. that had growth potential. The bios were there. And the first generation, Genentech, Amgen, Biogen, Chiron, Genzyme, turned out to be pretty darned good cos. They continued to do well as folks noticed, again, that tech stocks were not generating free cash flow. Since bios had no earnings and no expectations of such for years, you didn't have to pay attention to such mundane factors. From 1989-1993, there was a huge IPO bandwagon of what I call garage biotechs, cos. that should have been venture capital and not public stocks. But the public's appetite was ravenous for these sure winners. Then after Billary started talking about a National Health plan, the stocks started to fade. And then, some got eps. Amgen and Biogen and Genzyme were great. Nobody else's eps seemed to live up to the promise. And, then, even worse, good drugs passed FDA approval and nobody bought them because there were other competing biotech drugs in the same area. This all combined with the 1994 mini dip to take bios crashing to the ground and through it. I started buying them selectively, at much lower prices, in early 1995. |
