Stock Markets – It’s Different This Time
“Those who cannot remember the past are condemned to repeat it.” George Santayana
On Monday October 19, 1987, I was working as a co-op student at Mercer. That day, stock markets around the world crashed more than 20%. As the news moved through the office, I remember being relatively detached from the significance of the moment. At that point in my life I had no savings, was still in school, lived in my parent’s basement and didn’t have the investing bug even though I was well aware of the stock market and how it worked due to the fact that along with horse racing, trading stocks was one of my father’s favorite pastimes.
By 1999 the events of 1987 were in the rear-view mirror and the world of technology was changing quickly. I had started ASI in 1998 which was made possible by a revolution in technology that allowed me, for less than $10,000, to replicate the hardware and software on which Mercer spent millions. By 2000 I was super busy trying to get our practice from a dream to a viable business. My friends joked at the time that I should add dot.com to the end of our company name and the value of the business would increase by a factor of 10.
April 2000 marked the beginning of the end for the ‘dot.com bubble’. The dot.com crash did not come on a single day – but by the end of 2002 the numbers were ugly and I will never forget the painful experiences in 2003 of meeting with my very few clients that required a pension plan valuation at December 31, 2002, with the prior valuation back in the better days at December 31, 1999. The era of endless surplus and contribution holidays ended abruptly and the ugliness of ‘solvency funding’ came into the light.
These events helped me better crystalize my understanding of stock market volatility and the propensity of investors to ignore the warning signs when markets are overheated. In 2000, I remember the very loud rebuttal to suggestions that the market was overheated that ‘it was different this time’. The suggestion was that the internet would change everything in business and these new dot.com firms would be all that was left when the transition was over. Although the bubble burst showing how not so different bubbles can be, we now know for sure that the thesis that the internet would change everything was bang on – and we have Facebook, Apple, Amazon, Netflix and Google as dominant proof.
No one knows for sure when a market has reached its top – nor its bottom. If anyone did, they wouldn’t be in the business of sharing that information with us and they would be on a beach on their private island which would probably be more idyllic than ever in the middle of a pandemic. In April 2019 I was worried that after a decade of stock market gains following the credit crisis of 2008, that markets were in fact heading for a bursting of another bubble. I also discovered that year that my 100% equity risk investment style that I adopted when I was in my mid-20s probably didn’t make sense for someone who was 30 years older. As a result, and scarred by the history of market bubbles, I made some choices to take less investment risk going forward.
By February 2020 I was able to congratulate myself as a strain of coronavirus spread through the world and the markets corrected. My glory however was short lived. As we watched local and global businesses suffer major hardships, investors ignored the facts and continued to buy stocks driving markets to new highs. Two weeks ago, amateur investors drove the shares of GameStop to levels everyone agrees make little sense and last week it appears that silver was the investment of the week. I can’t help but feel that around the time everyone is convinced that it is easy to make money investing is about the time the music will stop and everyone will be scrambling for a chair.
Lessons Learned – Again
I am proud that my kids, in their early 20s, have already absorbed my lessons about spending less than you earn and saving for the future. For them, retirement is too far off – but the dream of owning their own place to live so they don’t have to live in Dad’s ‘my house my rules’ world is a dream for which it is well worth saving. Unfortunately, they have discovered how little interest their money earns sitting at the bank and thus have been called by the media, their business school classes, and friends to jump on the investing bandwagon.
Things are different than when I was their age. Investments include invisible assets like Bitcoin and you can invest in a business buying and re-selling things on the internet. You can start a drop-shipping business with goods from China or start a small business selling your wares on Etsy. In days gone by you could become a YouTube star – but now hitting the jackpot on TikTok is where it’s at. I have become the grumpy old man saying that none of this makes sense.
Against this backdrop younger savers are loading up on stocks without the training to really evaluate the merits of each investment. Many of us have seen the picture that Tesla is now worth more than about a dozen major car manufacturers combined, many of which have their own electric models on the way. The pandemic has seen main street and wall street go in opposite directions.
Some argue that the bubble is concentrated in only a segment of the market and given today’s low interest rates many other businesses are valued fairly. Unfortunately, in my experience, when bubbles burst everything goes down as sellers run for the exits without discriminating between the good holdings and the bad. Ironically, these become buying opportunities for the professionals.
I may be wrong but this sure feels like the upward climb in stock prices can’t go on much longer and I fear for the young investors that weren’t around for past bubbles to burst and have fallen for the myth that it really is different this time. I am not so sure.