I don’t think there is any better teacher than history for investors today.
“There is no better teacher than history in determining the future… There are answers worth billions of dollars in a $30 history book.”
― Charles T. Munger, in Poor Charlie’s Almanack
‘Bull! A History of the Boom and Bust’ by Maggie Mahar covers the beginning of the bull market in 1982 through the tech bubble bust and beginning of the recovery through 2004…
“The most reckless…made the most money”
Of course I knew what happened during the tech bubble, at least on the surface. But to read the details of how AOL fluffed their accounting, how Dell was making more money selling options on their own stock than selling computers, how CEOs were selling millions in stock, and how bearish analysts were getting death threats, that was a level of detail I had not read before.
Mahar does an amazing job building up the bull market. In fact, the crash is only covered in the last couple chapters. Most of the book covers 1990-2000, when the modern day CNBC was born, when stay at home day traders were making $20,000 a day, when top stocks on the NASDAQ would trade at triple digit P/E ratios. She makes you feel like you are there, surrounded by euphoria. Of course, we all know how this was going to end.
Reading the lessons of the 90’s bull market should be required reading for investors.
Lessons from the Bull
I took away 3 major lessons from the book, and the tech bubble.
Bull (or Bear) Markets Can Go On Longer Than You Think
In hindsight, it seems like the bubble should have been so easy to avoid. When stocks are priced so high, simply sell, right?
Alan Greenspan warned of the market’s risks with his “irrational exuberance” speech…in 1996 – a full 3 YEARS before the NASDAQ topped out. Would an investor have been right to listen to the Chairman of the Federal Reserve and sell their stocks? Probably, but that investor who sold in December of 1996 after Greenspan’s speech would have had to watch the market climb 400% before it corrected.
In 1995, everyone knew AOL was playing games with their accounting. But it didn’t matter, the stock was going up and no one wanted to be left behind. Analysts focused on subscriber growth, while neglecting the millions in losses. It took 5 years for AOL to top out and come crashing down. An AOL bear in 1995 looked like a fool for 5 years!
Looking back, it’s easy to say “I’ll just sit on the sidelines until it passes”, but that means you would have to watch your neighbors getting “rich”, read news stories about the immense wealth being created, and watch the investments you just sold climb even higher. Mahar details how the stock market became a national past time, how bullish analysts were praised while bears humiliated on national television, how individual investors quit their jobs to trade their retirement accounts – and were treated like celebrities in the newspapers.
Imagine talking with your neighbor, who was up 108%, as the NASDAQ was the 12 months prior to March 1st, 2000, and you had to admit you were earning 7% yield in t-bills. It would be humiliating, and I could totally see the pressure you would feel to rush inside to buy the latest hot stock.
John Maynard Keynes is famous for his quote: “The markets can stay irrational longer than you can stay solvent”. And Mahar shows in beautiful detail exactly how that is the case.
“You Can’t Eat Relative Performance When You Retire”
This might be my favorite quote from the book. And it really got me thinking. Is relative performance really that important?
Today we compare every fund manager to the S&P 500. If they don’t match the index’s performance we consider them a failure. But is the index return really what we should all be striving for?
In January of 2000 you could get nearly a 7% yield on U.S. Treasuries, a rate that would double your money in 10 years. 7% was probably a high enough return to set up hundreds of thousands of people on a path for a decent retirement. What stopped so many from locking in a 7% gain?
They were told stocks would do 10%.
The fear of underperforming their neighbors was too much. And that fear cost many their retirement.
If you have your nest egg built up today to a level you are happy with, do you continue to hold Amazon stock trading at a 193 P/E ratio, Facebook at a 45 P/E? Why?
I would think most are in the same boat as that investor in 2000. We are afraid to underperform relative to others.
We don’t hold very many industries to the same standard. Did Bruno Mars fire his team because his record sales ‘underperformed’ Adele, Beyoncé, Coldplay and 20 others last year? I doubt it. Many are happy with acceptable levels are return. But the stock market never settles for just enough.
Long term 7% annual returns would be considered very successful, any very few took it.
Many of us have the opportunity to set up portfolios for ourselves that have very good chances of decent long term success, and we sacrifice it all in an attempt to invest like the best. It’s pure greed and envy – exactly what drove the 90’s bubble.
Don’t Trust Analysts (or Fund Managers)
A ton of professionals knew that the market was way, way overpriced in the late 90s. In emails, analysts would question the $400 price tag on Amazon, but they would publish bullish reports recommending the stock anyway. Fund managers, who had decades of experience and knew a crash was coming were putting their clients 70 or 80% in stocks, while their personal accounts were in cash and bonds. Why?
Mahar details a few individuals that tried to fight the bull and ended up gored – One was Jeff Vinik. Vinik took control of Fidelity’s flagship fund, Fidelity Magellan in 1992 after the legendary Peter Lynch stepped aside. Vinik, a value investor at heart, began reducing the fund’s exposure to tech stocks starting in 1995. And Despite a 36.8% return in 1995, Vinik would be forced out by Fidelity in May of 1996 because he was not keeping up with the tech market.
Fidelity was fighting a battle that every mutual fund company and manager was fighting. Do you manage your client’s investments safely? Or do you do what will attract the most money? Vinik cost Fidelity over $100 million in fees by not keeping up with the market in 1996. He would have saved his clients much more than that if Fidelity would have kept him around.
Ultimately for mutual fund companies and fund managers, it is better to be wrong with the herd than wrong by yourself. Fund managers who were down 40% in 2001 looked no worse than anyone else. But a fund manager that was “only” up 20% in 1996 when others were up 40% looked like an idiot. Many lost their jobs because they were (rightfully?) worried about the risks they were exposing their clients to compared to their company’s fundraising efforts.
Stock research analysts didn’t have it any easier. Many were prevented from saying bad things about high flying tech companies that their employer had taken public just months before. Many feared how mutual fund managers would rate them if they downgraded a widely held stock. And to top it off, if you weren’t scolded by your own company or fund manager, you would be hated by the public who saw your bearish reports as “the reason their stocks went down”. Besides the few independent research firms, there was very little objective recommendations on Wall Street.
Read this book and then tell me why you should care at all what the next Goldman or J.P Morgan analyst has to say about a stock. It’s crazy! The majority of Wall St. exists to sell you something – remember that and you might get out alive.
Relating the Tech Bubble to Today
Throughout the book I kept relating today’s 8+ year stock market climb to the 90’s tech bubble. We are obviously not at a “2000” level of enthusiasm, but there are some similarities. The 90’s advocates of “stocks for the long haul” and “buy and hold” certainly have come back. Indexing was preached as gospel back then too – of course it didn’t help that all the top holdings of the index became high flying tech stocks. I see the start of that today with Facebook, Amazon, Google and Microsoft rising to dominating roles within indexes.
But, it can go on a long, long time.
Ben Graham would argue to always hold at least some stock in your portfolio, and allocate more conservatively each year they go up. Have 70% in stocks today? Make it 60% next year, 50% the year after, etc. Graham advocated never going below a 25% allocation into stocks (or bonds). That way, if the market continues to take off, you still reap some rewards, while having a portion of your savings protected in safer assets.
Bull! Is certainly a book we can all learn a lot from.