Diary of a Fund Portfolio Manager
Robert Loest, Ph.D., CFA
Portfolio Manager
Earlier Diary Entries
May 23, 2000: More Random Musings. It looks to me like we had a second important test
of the bottom today. I've said for several weeks now that I think about 3,100 for the Nasdaq
Composite, as a rough guess, is a worst-case downside. If we break much below that, I'll
rethink things, but I'd be surprised to see it. All we need now is patience. This is probably
the most valuable trait an investor can have, but it's tested only rarely, and many fail the test
the first time.
Here's how I arrived at that approximate 3,100 number. The three year annualized return
on the Nasdaq through Sept. 30, 1999, was 30.8%. The 5-year return to Sept. 300, 1999, was
29.2%, so the returns have been fairly consistent since the Internet Era began. I picked the
end of September, because the huge monetary stimulus to the economy produced by
Greenspan and the Fed since Dec. of 1998 finally had its effect in the stock market bubble
beginning on October 2, 1999. That is when we saw the huge run-up in stock prices that
peaked on March 10, and bottomed, as a result of the Fed's soaking up the excess liquidity,
on April 15, with a 34.27% drop to 3,321, and again on May 10 at 3,384. The intraday low has
been lower, but still well above 3,100.
We've had about 7 months of growth since the end of September, so let's just use half
of the 30.8% rate, or 15.4%, and assume that, absent the artificial stimulation by Greenspan,
the Nasdaq would have been about 15.4% higher after about another 6 months. Multiplying
the Sept. 30, 1999 value for the Nasdaq of 2,746.86 by 1.154 (1 + 0.154) produces a value for
today of about 3,170. This kind of forecasting is as much black magic as it is common sense
and experience, but it does tend to put things in perspective, and give us rough bands within
which to reasonably expect the Nasdaq to move most of the time. If we assume 3% daily
volatility, then we have a range of 3,169 + or - 100. The intraday low on the Nasdaq on
Monday the 22nd was actually 3,172.65 (a drop of over 37% if you count intraday lows), but
who's quibbling? So far, after the low of April 14 and two retests, the behavior of the Nasdaq
still fits my prediction.
Drops of this magnitude have occured only rarely in history. The last was in 1987.
Before that it was 1980 - '82, before that in 1973 - '74, and before that the Great Depression
that began in 1929 and bottomed in the early 1930s. Even the Great Depression market
catastrophe could not have been engineered without major government meddling in the free
markets by both the U.S. and European legislatures and central banks. The 1973-74 horror
was a unique event for reasons I've discussed in the Commentaries. The 1987 crash was also
caused by Greenspan, and further damage was prevented by Fed action when Greenspan
realized how badly he had screwed up.
So, people who say we still have further significant downside from here I think are
obligated to show us exactly what kind of event will turn this drop into a real catastrophe. I
don't see it. Market drops like this don't have any staying power against the backdrop of a
strong economy like we have today. The SuperBears can't just waive their chalk and yammer
about excess valuations. They haven't any more idea of what Interwoven, Yahoo! or Napster
is worth than I do, and I don't have a clue, and don't know anyone who does. If they can't
point to some specific, horrific Grendel that's going to make things worse, ignore them.
There are professional doomsayers in every field. As Carl Sagan said, catastrophic
predictions require more stringent measures of proof, and I haven't seen it.
Growth in both the economy in general, and in particular in many of the stocks you
own, has actually accelerated during that 3.5 year period. Therefore, I regard 3,100 as pretty
much a worst-case scenario. Even Greenspan isn't crazy, just misguided, and he still has to
answer to the Federal Reserve Board Governors and the political establishment, neither of
which is suicidal, despite their occasional, accidental attempts.
So, the Nasdaq is simply where it would have been with normal growth, absent the
artificial stimulus by the Federal Reserve. It may take awhile for it to resume its growth, but
I think all that's required now is patience. The market's psyche has been wounded. Like a
person who's been hurt, it takes awhile to get over the trauma and heal. The market (and a
person) will test the hurt a few times just to make sure it's not really a lot worse. I'll test a
bone several times that I've broken while skating, each time a little harder, to make sure it will
take another fall. When I'm satisfied it's healing, I start skating again. Once the Nasdaq is
satisfied it's not worse than it originally thought, and that healing has begun, we'll see a
resumption of growth in stock values.
In my opinion, this crash in the Nasdaq will be looked back on in years to come much
like we look back on the October crash of the Dow in 1987. It will be seen in retrospect as one
of the best buying opportinities of the decade. We are not going back to manual typewriters
and dial telephones. The Internet really is here to stay, and productivity growth really has
just begun. You ain't seen nothin' yet. |
