Notice that the only currently popular tech stocks that were part of the mania in late 1999 are Amazon and Microsoft. Amazon got vaped in 2000-2001 going from a high at $106.69 to a low of $5.97 per share. It didn’t get back to $106.69 until late October of 2009 and Microsoft’s recovery from its vaping of 65 percent took over 15 years. The risk-reward relationship always gets reestablished, just like nicotine’s addictive power has its way. Don’t kid yourself for one minute, very few investors make it through those vaping phases as ongoing owners.
Many charts have been out recently showing the big chasm between the pricing of value and growth securities making up the S&P 500 Index. Will the vaporization of Facebook and Twitter be a temporary blip in continued success for puffed-up tech momentum stocks? Is the largest single day decimation of capital a “warning shot across the bow” of a stock market that still has more people and more capital to addict before its ultimate top later in an extended cycle? Or, will the recent vaporization be the trigger of a major comeuppance for the market’s largest and most popular securities? We don’t have the answers, but we are very content to practice our stock picking discipline at prices that have worked in previous eras.
At Smead Capital Management, we believe common stock ownership always needs to be practiced within the confines of a healthy view of risk and reward. Those confines are being stretched in an unhealthy way via an addiction that over-confident buyers have for today’s futuristic favorites. This financial euphoria episode could be opening the door to stockholders getting their capital vaporized, either directly or via indexes and ETFs. It has already happened for some Facebook shareholders.
William Smead is CIO and CEO of Smead Capital Management.