You can have already celebrated 15 years as a financial advisor and never have seen a real stock market bubble -- or anything remotely like one.
But that’s understandable, because they don’t come along very often, any more than great, epochal bottoms do. In between manias and crashes there are immense secular waves. Not of stock prices -- those are an effect, not a cause -- but of investor psychology, which cycles from abject terror of equities to blissed-out new-era greed, and back again. Regarding the former, I invite your attention to the years 1949-1968; for the latter, 1968-1982.
From the ashes in the summer of 1982 rose the greatest bull market in history. It ended, as all genuinely secular bull markets can only end, in a spectacular stock market mania: one worthy of its own chapter in an updated Extraordinary Popular Delusions and the Madness of Crowds. This was the dot.com bubble.
Advisors who did not live it -- and even those who did -- should school themselves in it. Not just for its sheer entertainment value, which is terrific, but to gain or regain some sense of where we currently are on the great terror/euphoria cycle.
By far the definitive account is John Cassidy’s classic Dot.con: The Greatest Story Ever Sold, published in February 2002, while the market was still utterly crashing. (It would not be until September that Mr. William Gross would write his “Dow 5,000” screed, which would inevitably prove to be the next best thing to a buy signal from God.) Dot.con is thus remarkable both for its palpable sense of immediacy as well as for Mr. Cassidy’s measured development of all the forces that coalesced to create the bubble.
The personal computer, then the Internet itself. That golden geopolitical era between the fall of the Soviet Union and 9/11. Investor psychology breaking into a gallop, the hiccup of 1987 long forgotten. And finally, the emergence of a genuinely new-era idea: that the growth potential of e-commerce was so insanely great that companies could be taken public -- and would soar -- in the complete absence of current or even foreseeable earnings. (Does no one remember the Pets.com sock puppet?) These are the themes Mr. Cassidy expertly weaves together in Dot.con.
Despite wild gyrations and even new highs in the interim, the secular bear market that began with the implosion of the dot.com mania did not end until March 9, 2009. And despite tripling those lows, the current bull market remains the most hated and feared of my lifetime. Thus it’s imperative that we read (or re-read) Dot.con most of all for perspective.
When you do, you’ll realize that we needn’t begin really worrying until the knuckle-draggers commence yet again to intone those three magic words: “Earnings don’t matter.”
© 2016 Nick Murray. All rights reserved. Reprinted by permission. Nick reviews current books, articles and research findings in the “Resources” feature of his monthly newsletter, Nick Murray Interactive. To download the most recent sample issue, visit www.nickmurray.com and click on “Newsletter.”