Capitalism is alive and well with the Nasdaq composite index trending above 5,000 last quarter for the first time in 15 years since it hit 5,048.62 on March 10th, 2000 during the dot-com gold rush.
With many investors still having a bad taste lingering in their mouths from past market crashes, they may stop to consider the famous saying by legendary investor Sir John Tempeton, “The four most dangerous words in investing are: this time it’s different.”
Of the top 20 Nasdaq companies by market capitalization in 2000, only four — Microsoft, Cisco Systems, Intel and Qualcomm — remain in the top 20 today.
Eight companies listed on the Nasdaq no longer exist as independent companies, most as a result of bankruptcy or acquisition, and several are shadows of their former selves. The current Nasdaq composite index has only about half as many companies as it did in 2000. (NYT, March 2015, Nasdaq Changed in Its Climb to 5,000)
While the high tech sector is still a dominant player in the US stock market, this time is in fact different. Bubbles and their eventual sell-off’ s are a combination of poor liquidity and deficient valuations spiked by greed and investor psychology, as we saw again during the 2008-2009 credit and real estate led bubble crash.
From a liquidity perspective, before the 2002 Sarbanes-Oxley Act set new and enhanced standards for all US companies and IPO’s, many new high tech company brands were launched in the last 90’s with nominal cash, poor business plans and VC funding by boutique banks that are no longer in existence.
From a valuation perspective, studies indicate that over 50% of the VC dot-com startups failed within two years of going public, costing investors hundreds of millions of dollars, including the infamous pets.com.
More people remember the adorable sock-puppet dog from pets.com commercials, than what the company was actually selling online.
Before the days’ of watching Shark Tank on TV, investors on Wall Street and main street quickly learned the hard way about business planning, execution and valuation which are all driving forces behind a stock’s price. Pets.com had an inadequate business plan, high product costs and low market research.
Investor psychology should be a bit stronger in the high tech stock arena today than back before the dotcom bubble. In today’s more transparent and regulated environment, many high tech leaders are more established, have proven sales and huge cash silos.
Apple and Microsoft, with over $160 Billion and $85 Billion in cash reserves respectively, have greater reserves than the US Treasury and many countries around the world.
We tell new clients that may have been burned back by the dot com bubble to also look no further than the NASDAQ forward earnings valuation. The P/E ratio of the NASDAQ today which is hovering near 23, is greatly below the ridiculous valuation of over 100 before the dot-com bubble.
Back in 1999, many investors were following the herd and buying into new dot-com companies like the 1800’s gold rush or the 2000- 2006 real estate fiasco without even knowing what they were purchasing.
We remind our clients of a famous quote by Charlie Munger that “All intelligent investing is value investing – acquiring more than you are paying for. You must understand and value the business in order to value the stock.”
For more information on our firm or to request a complimentary consultation please email [email protected] or call (561) 210-7887 today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not protect against market risk. Loss of principal may occur.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. No strategy assures a profit or protects against a loss. Investing involves risks, including possible loss of principal