In many ways, the current Stock Market is living in the land of “irrational exuberance.” Just as nothing could stop the rise of anything related to the internet before the Dot Com Bust, we’re reliving the relentless rise of high tech stocks nice again.
At some point, the long-term economic damage from the COVID-19 Pandemic will finally exhausts itself. Stock Market gamblers will wake up to a cold shower…
We feel the current speculation is likely to end in the crash of 2020-21. We hope not, but it’s looking that way. Once again we hear novice investors telling me why they won’t lose money in a crash.
“Don’t worry, the Stock Market always comes back.””
“If we have a crash, the Federal Reserve will fix it.”
“I trust my broker, he’s made me lots of money.”
“Oh, I’ll sell before my stocks sell off.”
But, what if These undying optimists are wrong.
Investors Walking Blindly into Risk
We were told exactly the same things before and during the Dot Com Crash… again before and during near catastrophic meltdown of 2008. The eternal optimists were wrong… dead wrong.
We saw the Dot Com bust coming and wrote about it before 1999. Many others did. Warren Buffet warned of the blind risk he saw in Berkshire Hathaway’s 2000 Annual Report. It’s a report that could have been written this year.
“Far more irrational still were the huge valuations that market participants were then putting on businesses almost certain to end up being of modest or no value.
Yet investors, mesmerized by soaring stock prices and ignoring all else, piled into these enterprises.
It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them.“
History Repeats Itself
To each new generation of investors history repeats itself, financial lessons are learned the hard way.
The internet did indeed change the world. Communications and commerce will never be the same. There were huge winners and losers who have been quickly forgotten. One of hundreds of failed Dot Coms include EToys.com which failed miserably.
Inconceivable Expectations Always Yield Disappointment
Just as investors back then priced Dot Com Stocks for inconceivable expectations, history is repeating itself today. The younger generation is piling into companies with cool,sounding names.
We worry that no amount of future growth can possibly justify the current prices of these popular Stocks.
|
Company |
Price-to-Revenue Ratio |
1-yr. Revenue Growth |
|
Zoom (ZM) |
107 |
190% |
|
Slack Technologies (WORK) |
23 |
51% |
|
Twilio (TWLO) |
34 |
58% |
|
Shopify (SHOP) |
62 |
60% |
|
DocuSign (DOCU) |
37 |
41% |
|
CrowdStrike (CRWD) |
49 |
86% |
|
Datadog (DDOG) |
60 |
81% |
|
Fastly (FSLY) |
50 |
45% |
It’s not the case that these companies don’t offer good services, it just that novice investors are speculating (gambling) and bidding up prices to unsustainable “bubble” levels.
Eventually these companies must meet profit expectations of shareholders. Or their valuations must come down to realistic expectations. You can be sure early investors will make untold millions promoting these Stocks and selling out. The founders may become billionaires— but, who is left holding the bag when each bubble bursts? It’s novice investors sucked into dream of wealth and overnight fortunes.
Hey What Do You Know?
I know, you’re thinking I’m an old guy who just doesn’t understand this new technology. .. this time is different. When I tell you I didn’t lose a dime in the Dot Com Crash or in the 2008 Meltdown, maybe my advice may make some sense after all.
When I tell you I wrote vehemently in the Austin Report warning others, well in advance of each crash, maybe you’ll think twice. Maybe I can save you some heartache and costly losses with this sage advice.
- Don’t put all your eggs in the Stock Market or a basket of hot stocks.
- Overconfidence destroys wealth during crashes as you refuse to sell.
- If you’ve been lucky enough to rise with the recent gains, be smart enough to take some winnings off the table.
- Many an investor doubles down on a falling Stock thinking this is just a little correction, my stock will go right back up, it always has. Don’t do it.
High growth today for companies like Zoom, Shopify, Crowdstrike, and Datadog during the pandemic is no assurance they can justify high valuations post pandemic.
Sell some Stock, take some profit, buy some Gold for safety, security, and diversification.