I sit here on this early March 2015 day, a day where the Nasdaq briefly broke the 5,000 level for the first time since 2000. It brings me back to memories of conversations I had with clients and friends in the late 1990s, trying to convince them (usually unsuccessfully) that their love of day trading dot-com names would likely come back to bite them hard…which of course it did. Often, our biggest opponent when it comes to investing is ourselves. We are emotional beings, we want more of what feels good, less of what feels bad. Who didn’t want to own JDS Uniphase stock as it rode from $80 to $1,000 between February 1999 and February 2000 (but now trades at about $13)? How about Cisco, which quickly ran from under $10 to over $75, but has generally hovered below $25 since?
JDS and Cisco are actually success stories, from the standpoint that both companies are still around and have been able to be profitable businesses. Anyone remember Pets.com? After a huge IPO in early 2000, the company folded by November of that year. How about Webvan? This grocery delivery business raised $375 million in its November 1999 IPO, soon more than quadrupled in value, and yet was out of business by July 2001. I myself remember feeling like a genius when I got in “early” on Nortel Networks, buying in around $200 in 1999 and watching the stock peak at nearly $750 in April 2000. Within a year, the stock was below $80. I think I got out around then, well before the company took its big plummet towards $0.
Hearkening back to those times reminds me of two important themes we try to reinforce with those we advise.
• Investing is Really Hard – It can be fun, especially if you happened to make 10x your money on JDS Uniphase. But how many of us actually got in at $80…and had the foresight to get out at $1,000? Many many more investors did the opposite, buying in near the peak and jumping ship eventually on the way down. There are thousands of large cap equity mutual funds out there, with teams of managers and analysts getting paid big bucks to do nothing but research companies. Yet less than 25% of them tend to outperform the S&P 500 over time. There’s nothing wrong with dabbling in some stock picking ourselves, it can be fun and it is great cocktail party conversation. But it should probably be for sport, because we are fooling ourselves if we (who work other full-time jobs, or like to spend our time playing golf or socializing with friends) think we can outperform a market where 75% of the professionals who spend all day every day doing the research can’t do it consistently.
• Managing Investor Behavior is Critical – Since 1984, respected research firm Dalbar has prepared a study examining actual investor returns as compared to the S&P 500. Over the 30 years ended 12/31/13, the S&P 500 generated an annualized return of 11.1%, while the average equity mutual fund investor achieved a return of just 3.7%. In other words, actual investors earned barely a third of what the overall market generated. Why? Behavior…investors seeking to “outperform” and often without sound investment plans tend to jump in and out of their investments at exactly the wrong time. Vanguard recently performed a study analyzing where advisors actually add value. They found the biggest value an advisor can provide is behavioral coaching, keeping their clients from making emotional mistakes. They quantified that value at 1.5% per year. Whether that number is right can be debated, but the point is investors’ biggest roadblock to sound investment results is often themselves.
The good news is, today’s Nasdaq at 5,000 is much more reasonable than back in 2000. In 2000, the P/E on the Nasdaq was somewhere between 100 and 200, depending on which measure of earnings you used. Valuations today aren’t cheap, but with a P/E of around 21 (per JPMorgan Weekly Market Recap dated 3/2/15), there are actually profits supporting the current price level. So, these days don’t feel at all like the dot.com bubble days. But, it’s a good time to remind ourselves that investing isn’t a game and maybe the most important thing we should concentrate on managing is our own investment behavior.
p.s. Proof that sock puppets don’t correlate with successful stock performance. Who remembers this guy?