I was a new dad in the late 1990s, during a heady time in the stock market. Companies like Pets.com, e-Greetings, Red Hal, CMGI, Webvan all were hot, and all the other new parents talked about that at every kid birthday party. Some felt like they struck gold, and the others were feeling left out. Sound familiar?
The internet was pretty young at the time, and many people were day-trading, some even quitting high-paying jobs in law and business to trade stocks full time. So what if those hot companies didn’t have any profits? They thought they would grow into those lofty valuations and that there was no end in sight to their potential for continued growth.
“It’s different this time,” is something we hear a lot when the market goes through a sustained period of rising prices and frothy valuations. We may see investor behavior that looks speculative, or even reckless, but the forces behind the market keep propelling it upward. As John Kenneth Galbraith put it in A Short History of Financial Euphoria, “There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely, increasing returns and resulting values.”
But is it indeed different this time?
Going back to the late 1990s, there were signs all around us that things were getting excessive. There were “new paradigms” for valuing companies, and companies encouraged us to rethink the metrics of investing in these companies. I am not predicting a near-term market crash or even saying that this market behavior cannot continue for quite some time. Yet, when I think about that era, I can’t help but think about what the market was like when it turned out that things weren’t really different this time, and we started off the new millennium with three years of negative returns for the S&P 500.
As the world emerges from the COVID-19 pandemic and the economy is buttressed by the twin support of fiscal and monetary policy, we appreciate what the markets are giving us but we remain vigilant.
There are signs of excess that we are monitoring carefully as we navigate through the next phase of this cycle. For instance, what is the rise of SPACs telling us about the availability of capital? What does the multibillion-dollar blow-up of private hedge fund Archegos Capital tell us about risk controls? The higher Bitcoin goes, the more investors want to plow money into this asset, which has no agreed-upon intrinsic value and has already risen more than 700% in the past year. Will rising interest rates continue to hurt the valuations of the seemingly bulletproof FAANG stocks? Is the $69 million paid at a Christie’s auction for a piece of crypto artwork the way of the future, or just another sign of speculative excess?
As the legendary investor Warren Buffet said, “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” While it can seem safe when the market is on the rise, investing in the markets is not a riskless proposition. We are watching and staying super-alert to developments that can arise when some market participants become overly exuberant.