As a 37-year veteran of the investment business, there is only one guarantee: things are going to change. When railroads were the rage, booms and busts in the U.S. economy were closely tied to the rush attached to them. In 1862, President Lincoln signed legislation which funded the building of an “overland route” to the west coast which started in Council Bluffs, Iowa. The Union Pacific Rail Road was born and eventually was merged with the Union Pacific Railway. It declared bankruptcy in the Panic of 1893.
Bustling excitement in the new technology surrounded automobiles and air flight, and the development of the radio business created a U.S. boom in the 1920s. RCA was the maker of radios, the owner of a major radio broadcasting company and the producer of a great deal of the content broadcast on the radio. RCA’s boom was centered in New York City because NYC was the hub of the entertainment industry at that time. The crash of 1929 and the depression which followed caused both good guys and bad guys to lose on that euphoric bubble.
In past missives, we have reviewed the Nifty-Fifty mania of the early 1970s, the mania for inflation hedges in the late 1970’s, the tech bubble centered in Silicon Valley in the late 1990s and the residential real estate bubble of the mid-2000s. All recorded history argues that Warren Buffett is correct about exciting rushes in investment markets. He says that euphoric bubbles are like Cinderella at the ball, “the clock eventually strikes midnight and everything turns to pumpkins and mice!” History would argue that Seattle is late in its tech rush and since Amazon is at the heart of Seattle’s financial euphoria, investors should be highly cautious.
Psychology
At stock market extremes, there is uniform bullishness or bearishness among professional investors. Recently, the Investors Intelligence survey of newsletter writers had its second highest reading in 30 years with 64% bulls and 15% bears. We believe their bullishness is tied closely to the tech rush in force.
The FAANG stocks (Facebook, Amazon, Apple, Netflix and Google parent Alphabet) have led the way by pasting the other stocks in the S&P 500 for two consecutive years.2 Historical statistics show that value outperforms growth over long stretches of time, but growth stocks, led by Amazon, have smoked their value brethren the way the local sheriff thwarted the good guys in the Jimmy Stewart movie, The Far Country.
On Amazon, the Wall Street research community has 92% of its analysts with buy ratings out of 50 total analysts. Despite the shrunken number of research firms on Wall Street, having 50 research analysts is a huge number. Walmart and Oracle both have 36 analysts following them, as an example.3
The ultimate psychological indicators in a gold rush in technology are the homes and headquarters buildings built during the boom. Amazon opened its biosphere headquarters this year and is very anxious to create another one in a city which is yet to be named. The Empire State Building, Bill Gate’s Lake Washington home and Devon Energy’s headquarters correctly punctuated prior gold rush environments in 1929, 1999 and oil in 2008. Will this time be any different?
Unfortunately for our readers, we have no ability to time these phenomena. Buffett says, “Our job is to decide whether, the market’s job is to decide when.” We are willing to stand up at this point and argue that what is left to gain from the current mania continuing is not worthwhile in relation to the risk investors are taking both in Seattle’s commercial property market and in Amazon’s stock. We can’t be visualizing what would ruin the run this amazing company has had, but history would argue that those late to a rush come out injured on a stock or owing somebody money on a loan.
William Smead is CIO and CEO of Smead Capital Management.