Investing Like its 1999
Today’s AI-driven climate reminds me of the 1990s internet-driven stock market bubble. I can recall, like, yesterday, when I decided to de-risk our portfolio.
Flying from Oklahoma City to Houston, I overheard two young guys discussing their portfolios. They were planning to retire in less than five years. I could hear the 'hot tips' they were sharing.
When I got home, I told my wife why I was selling a significant amount of our portfolio—those dudes on the plane. Liquidating 30% of our stock portfolio in February 2000 helped us avoid some of the losses.
The NASDAQ peaked on March 10, 2000, at 5,049. The major selling started after that and continued through April 2000. The NASDAQ bottomed out on October 9, 2002, at 1,114. Down 78% from the March 10, 2000 high. Driven down more by the September 2001 terrorist attack on the Trade Center and DC. Market bottoms correlate with bad black swan events. Fear dominated the headlines.
Today's AI-driven bubble feels like the dotcom bubble. Huge bets on unprofitable technologies. The biggest investors are the companies building a footprint to capture market share. Some may make a lot of money in a decade. Most won't.
The NASDAQ is currently trading at 26,113 this morning, more than 548% above the last bubble on March 10, 2000. Comparing the NASDAQ figures without context is misleading because inflation has eroded the value of the dollar over the last 26 years.
Let’s compare inflation-adjusted price-to-earnings ratios. The Case-Shiller PE Ratio is a 10-year inflation-adjusted earnings metric. Today, that figure is 41.6. In November 1999, it peaked at 44.19, four months before the dotcom bubble started to burst. A more normal range for this metric is for stocks to trade in the 16 to 18 range. Based on historical norms, the market is pricey.
Have I reduced my investments in the stock market? Yes. I started doing that a couple of years ago. Stocks are now 40% of our portfolio. The rest is in cash and near-cash investments, gold, and Bitcoin. I can’t predict stock market sell-offs because nobody can. The figures don’t lie. A lot of money is being bet on the future of AI ( like the internet in the late 1990s). The internet ended up being a pretty good investment if you purchased the S&P500 after October 2002 and held on. Or, if you had the good fortune to hold Amazon.
There will be a sell-off. When is the question, not if.