- This month memorializes the passing of the tech bubble—a prototypical bull market peak where the laws of supply and demand dominated.
- Strong demand boosted stock prices, high stock prices encouraged new share supply, and that supply overshot the target—resulting in a nasty bear market.
- Bubbles will always happen and investors must be ever-vigilant, but not paranoid—bubble paranoia has likely killed more portfolios than the reverse.
- After the tragedy fades, stocks always rise again. Even history's worst bears are simply swamped by the market's broader upward sweep.
This month memorializes the passing of the Tech bubble. What lessons can we learn a decade on? Nothing most investors shouldn't have noticed back then but conveniently forgot (and nearly always forget) at market tops.
2000 formed a prototypical bull market peak. Absent major government intervention, any market (the stock market included) is governed by two magical forces—supply and demand. Overzealous demand begets overambitious supply, and inevitably, we get a correction. It happened in the late 1960s when the stock market was swarmed by new investors and "conglomeritis" infected the world with a stock-financed merger binge. And again in the early 1980s when the Energy bubble formed and popped on the back of oil IPOs.
Lofty prices aren't questioned because the fundamentals are "different this time." In the sixties, conglomerates were the next evolution in modern business—touted in the headlines and business schools alike with blurry business lingo like "synergies" and "integrative technology." In the early eighties, inflation, the highly publicized OPEC cartel, war in the Middle East, and peak oil worries were the "new normal" underpinning energy prices. And of course, in 2000, the latest "paradigm shift" (always suspect that phrase) took the form of personal computers and the Internet.
Soon the Tech sector's sky-high stock prices made stock-financing (instead of cash or debt) a hot commodity. (In direct contrast to the cash mergers dominating the ensuing bull market—when share supply was shrinking, not growing.) Private firms were raising cash, providing liquidity for their shareholders, and giving up little control by going public. Wave after wave of dot-coms saw the lure of "easy" money and jumped on the bandwagon, announcing their own IPOs. But each successive wave had weaker and weaker earnings backing their stock. By March 2000, the market peak was littered with recently IPO'd dot-commers boasting barely a fig leaf to fight the chill breeze—it was high tide and something had to give.
Though the Tech bubble and recent financial crisis differed in many respects, the fallout has been similar. In both, a major bear market sparked a round of reactionary regulation (or threatened regulation) to prevent the next bubble. Back then, regulation targeted Worldcom, Enron, and shoddy accounting. This time it's a financial sector gone wild. But regulation predictably looks over its shoulder, neglecting the oncoming traffic. Although a bubble's causes are usually "obvious" in hindsight, few recognize them in the heat of the moment. Some new rules may prove beneficial and some harmful (though probably not bull market-stopping)—but there's no preventing one perceived market distortion without completely missing (if not creating) another.
Similarly then as now, after the tragedy fades, stocks rise again. And while investors should be ever-vigilant of inflated prices—bubble paranoia has likely killed more portfolios than the reverse. Even history's worst bears are simply swamped by the market's broader upward sweep, and the reward of participating in that longer move higher outweighs the risk of hitting a shorter-term downdraft. Turns out, in investing (as in life), "'Tis better to have loved and lost, than to never have loved at all."