“In winter we lead a more inward life. Our hearts are warm and cheery, like cottages under drifts, whose windows and doors are half concealed, but from whose chimneys the smoke cheerfully ascends.” - Henry David Thoreau
Winter invites reflection. As I look back on the year, I am sure I am not alone in thinking 2020 has been unlike anything I’ve ever experienced. But in the stock market, at least, I do have a certain feeling of déjà vu.
In the course of cleaning out a section of my office -- something I have to do every once in a while or risk burial by books and paper -- I came across a stack of old magazines that make my point.
This magazine was called Technology Investor and it debuted -- I am not making this up -- in March of 2000. As you may know, that was the peak of the great tech bubble. The magazine had an eye-catching cover, as you can see.
The NASDAQ peaked on March 10, 2000. It was a Friday. And the close was 5,048.62. Then the party ended. The NASDAQ didn’t bottom until October 2002, after it lost 78% of its value.
I kept this magazine because I thought it was a bell ringing at the top of the market. And indeed that was the case. By the way, I don’t write to make fun of the editors. Everybody who is in this business for any length of time gets lots of things wrong. I write to make a larger point about how markets can turn on the beloved darlings of the day -- and turn hard and without warning.
Flipping through this magazine twenty years later brings back memories. It is also, by turns, funny, sad and inspiring.
For example, there is a story about satellite radio with a sort of “gee whiz” quality to it -- a technology everybody takes for granted today. “The best thing since cable TV. Can’t get country music in New York City? Satellite radio will let you choose modern, classic, or hit country, 24 hours a day without commercials.” Golly! Back then, there were two companies going at it: XM Satellite Radio and Sirius Radio. They were still separate companies.
There are also bad jokes. “What do you get when you play a country song backwards? You get your house, your wife and your truck back!” Groan.
The magazine also ran some model stock portfolios. Oh, these are great. The debut “Core Portfolio” consisted of “leaders with excellent management” “great products” and “vision.” They included the likes of Applied Materials (up 183% the prior 12 months), Nortel (up 291%), Oracle (up 254%), Sun Microsystems (up 246%) and Qualcomm (up 1,788% -- in the prior 12 months!).
Of the dozen names here, I think maybe 3-4 worked out. Microsoft (which was up “only” 67% in prior 12 months), Texas Instruments (up 149%) and Qualcomm are all well above their 2000 peaks. That’s a telling anecdote in itself. You could’ve bought Microsoft at its highest price in 2000 and still be up more than 3x today. Not great, but at least you didn’t lose. And you could’ve added after the drop. The journey was tough, though, as you had to wait 16 years to get back to that peak price. Hard to imagine any investor holding on to the shares though all that.
Most of them didn’t do well at all. A couple were zeros or near zeros. Nortel, for example, went bankrupt. And does anybody remember Lucent? Several of these have yet to get above their 2000 peaks (i.e. Intel) even 20 years later. And this was the core portfolio. The more aggressive portfolios included names I had long forgotten -- Marimba? Orckit? Zoran? Ariba? -- but at the time they were thought to be potential world-beaters.
(I wrote about Ariba c. 2000 as an exhibit of madness: The company had sales of $62 million with a net loss of $37 million and carried a market cap of $25.6 billion. That's a multiple of nearly 413 times sales.)
The returns on these things for the prior 12 months of that premier issue are eye-popping. Returns of 600%, 700%, even 1,000% were not uncommon. Many of these companies weren’t making any money. And several had no revenue. (Remind you of anything today?)
Anyway, not only did I keep my first issue of Technology Investor, I kept all of them. In the second issue, the editors were already patting themselves on their back regarding their portfolio selections. And why not, the returns were stunning.
Harry Newton, the editor-in-chief, wrote in his column that he was “shellshocked.” Three of their model portfolios were up “over 200% on annual rate.” The best was up 268%. These guys couldn’t miss. “Unreal,” Newton wrote. He was right.
The magazine ran for 11 total issues. For whatever reasons, it did not live to see the bottom. The last issue is dated January 2001. The tone of the last issue is quite different from the first. Newton, in his column, is circumspect about the whole thing: “Sanity returns to technology.”
He offers some lessons, which are not bad. The best may be this one: “The internet created immense opportunities. But only a handful are turning out billionaires. Once there were 3,300 carmakers in the US. All bubbles burst.”
That is, I think, the chief lesson in all of this. Sanity returns. When you’re in a bubble, it’s hard to see. All those tech companies that seemed so wonderful in 2000 had great entrepreneurs, great vision and lots of models and data supporting a path to riches. The people who wrote Technology Investor were not dumb. (They got quite a few big trends right, which is the inspiring part). They were people, just like us, who got caught up in the best party of the times.
Today, technology (broadly considered) again is the best party in town. People have made huge gains in stocks such as Nio -- up more than 10x since May of this year. I worry a bit when I see people tweet their portfolios to show how much they’re up this year and they’re loaded with speculative “tech” names that have logged huge gains. And some of these portfolios have massive exposures to one name, like 20%, 30%. How many of these will be tomorrow's Marimbas and Aribas and Orckits and Zorans?
I don’t know. Prophecy is a perilous business. Not all of today’s tech darlings will be dogs, of course, just as in 2000 they weren’t. There are some wonderful tech businesses today. Who wouldn’t want to own, say, Atlassian? What a business. But will it prove a good investment at today’s price? Maybe. It just seems like an awful lot has to go right for a long, long time. (A friend of mine seemed to sum it up. Musing on the valuation, he said: “Nosebleed.”)
Investing is not easy. When investing seems easy, it may be time to worry. At least, keep a sense of humility and try to maintain perspective. In that spirit, that I offer the above thoughts. And, as Martin Sosnoff, a long-time money manager and author, once advised: “Don’t worry too much… it’s still a long way to dog food for all of us in the Western world.”
Best Wishes for the Holidays
Thank you for reading. I wish you and yours a happy holiday season. It’s a busy time of year and so I plan to take a break from blogging for awhile. I’ll write to you again in 2021 - hopefully, brimming with new profitable ideas and insights!
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Published December 8, 2020
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P.S. My friends at Boyar are getting ready to publish their annual Forgotten Forty. I look forward to it every year. It’s like a Christmas present I can't wait to open. So I don’t mind helping to get the word out.
John Boyar describes it this way: “The Forgotten Forty, which features one page reports on the forty companies that we believe have the greatest potential to outperform the leading indices in the year ahead due to a catalyst that we see on the horizon.”
Jon tells me that “The Forgotten Forty 2021 edition is now available for purchase and if you buy it before 12/15/20 you will receive a $500 discount. As a bonus, you will also receive our November 2020 and February 2021 issues of Asset Analysis Focus (each issue will feature reports on three companies we believe to be undervalued).”
You can order your copy here.
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