tech bubble

When the Thrill Is Gone

We’ve talked before about how the ups and downs of the market are like being on a rollercoaster. The anticipation, the buildup—those things don’t have to be scary when we understand they’re part of the ride. For some, they’re even thrilling. 

This comparison is a little simplistic, sure. But there are valuable lessons in this image. 

For instance, one difference between the markets and actual rollercoasters is that the peaks and valleys of the stock charts aren’t being designed by skilled engineers. Charts are historical: their goal is to map the ride that happened, not the best possible ride. 

Take this example: as shown in the chart below, this company’s stock price climbed quickly during the tech boom. You can almost hear the coaster gaining steam—nearly vertical.  

graph shows a big climb

The company’s pre-2000 ascent. 

And then, as with all thrill rides, the drop (pictured below). Some investors aren’t sure which fell faster: the price or their stomachs. A rollercoaster engineer would be able to design that part in a way that riders would forgive them the jarring rise and fall.  

But what came next would probably get a rollercoaster engineer fired. 

graph shows a sharp drop

The company’s post-2000 fall. 

After the pop in 2000, the stock price balanced out. No more steep climbs: the thrill ride became a lazy river through the lowlands. Investors who held for the climb, and the subsequent drop, expected another climb. But the thrill was gone; the ride wasn’t the same.  

graph shows a sharp peak and then a mostly stable path

The map of the company’s whole ride. 

Okay, we’ll drop the coaster-cum-lazy-river comparison. You may have realized by this point that what we’ve just described is a historical example of a bubble: an excess of hype that ends with a pop! 

We mentioned that charts are maps of where things have been, so the lesson isn’t necessarily that they tell us where that specific thing is headed next… but they may be instructive in spotting similar rides in the future.  

Is it a thrill we’re game for? Or is it shaping up to be a thrill we’re not interested in, like the pop of a bubble? 

Clients, let us know when you have questions or want to hear more about what this all means for you. 

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NEITHER HERE NOR THERE
photo shows gold key in a lock hole

The secrets to success aren’t locked in the past, but they also aren’t waiting to be revealed in some crystal ball. History and context have plenty to teach us, and we ought to prepare as best we can for the future.

But success depends on our ability to move among the past, present, and future. That’s the key.

Imagine if we relied solely on the past. Human tendency leads us to believe current trends will continue. We are masters at spotting patterns and weaving details into coherent tapestries. (Those are the moves that kept us alive when our main job was to avoid predators and find sustenance.)

Today our brains try to do the same thing—to a fault, sometimes. Economic information surrounds us, and we want to find the story in it quickly. The brain wants to spot the pattern and react. When we learn that a company is finding some early success, for example, we want to conclude, “It’s a rocket ship, look at it go!”

Understanding the current trajectory is important, but the patterns of history are especially useful. Every age has fallen prey to some sort of mania. Tulips in 16th century Holland? Tech stocks in the 1990s? Not such different moments. There’s an edge in both knowing the history and being able to apply its lessons.

But what if that’s all we have, the wisdom of history? Well, we miss the big turning points, those moments of departure. We have to understand why and when a change might occur. The future will not be like the past: a proactive approach may keep us ahead of the pack.

In business, even when our past methods and processes have served you and us well, the world keeps spinning: we can expect change, which means we’d do well to keep an eye on potential opportunities, bargains, and possibilities.

My education includes a degree in history. When I was in college and developed a growing interest in business, I spent time on my own in the campus library with The Wall Street Journal and The Journal of Commerce. Like I’ve mentioned before, it’s tough to say which has been more valuable to clients—the history studies or the business reading.

How we got here and where we’re going are two different conversations. So the secrets to success are neither here nor there—literally. They’re in the wisdom in between, and we have to keep perspective.

Clients, if you would like to discuss this or any other topic, please email us or call.

The Longest Journey, Part One

© Can Stock Photo / sabinoparente

We have seen many clients make the journey to become more effective investors with more productive attitudes, beliefs, and habits. We are proud of the client who made the longest journey of all. Because it has so much potential for so many others, we are telling the story of W, our client, in this series of three posts.

W reached a place in his career where he had money to invest in the late 1990’s. He consulted us about investing—but did not become a client then.

Our principles led us to conclude that the red-hot technology sector, which everybody seemed to be buying, should not be purchased. The bargains we preferred were incredibly boring to W. An annual dividend of a few percent was not appealing compared to the prospect of continued 30-40% gains from the shooting stars.

(Long-time followers will recognize our three principles in this episode: avoid stampedes in the market, find the biggest bargains, “own the orchard for the fruit crop.”)

After the wheels came off the technology boom and W lost half his money, he brought what was left of his portfolio to us.

Many victims of the massive decline that began in 2000 learned the wrong lesson. Although ‘old economy’ companies held their own or gained while tech stocks plummeted, some learned that “the stock market is dangerous.” The correct lesson, of course, is that popular but over-priced assets are dangerous.

W, to his credit, had learned the right lesson. He remembered the advice he did not take, saw how that would have worked, and became a client. Meanwhile, the people who learned the wrong lesson sold out and usually went on to repeat their mistake elsewhere.

This was the first leg of the journey of W, where it really began. But he was not an effective investor, yet. Two more lessons were needed, further along the path.

We’ll be writing about those next two lessons in the days ahead. If you just can’t wait to learn the rest of the story, or want to talk about your situation, please call or write.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

This is a hypothetical situation based on real life examples. Names and circumstances have been changed. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

Stock investing involves risk including loss of principal.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.