What’s going on?

There are a few things we experience every four years; an extra day in February, an expectation that England will win the World Cup and on average a bear market (a fall of 20% or more) in stockmarkets. It amazes me that when the latter occurs, as it is in parts of the market just now, the media act as if this is a shock when to my mind it is the second of these events that is most surprising.

Don’t get me wrong, nobody likes to see the value of their investments fall, but this is something that you have to accept to get the long term benefits of investing. The falls will not be permanent but they can be disconcerting to experience. So what is the reason for the current sell-off?

The most recent market sell-off in 2020 was one where it was easy to identify the cause; a global pandemic is pretty hard to miss. In 2008 it was a financial crisis that caused turmoil and most of you will also remember the dotcom crash in 2000 where investor hysteria created ridiculously valued companies that inevitably came falling back to earth.

I think the current turbulence has a bit of all three in it, and in this missive I will compare the similarities to 2000 and where history rhymes with today.

I will compare the similarities to 2000 and where history rhymes with today.

I remember the late 1999 early 2000 period well. I had a client complain that their investments had ‘only’ grown by 20% over the previous year. Apparently this was terrible as he had a friend that had been investing in the NASDAQ and was making that in a month! This ‘terrible’ performance meant he decided he would be better off doing it himself and I never heard from him again.

It was a heady time with companies only needing to add the suffix .com to their names to see their share prices skyrocket. Apparently we were entering a new world where boring ‘old economy’ companies, you know the type that actually make stuff (and profits), were going to go the way of the dinosaurs.

In early 2000 it became apparent this new emperor did indeed have no clothes, and the whole tech sector came crashing down to earth. Numerous companies disappeared never to be seen again and even Amazon fell from $97 per share to $6. Hindsight shows this was the buying opportunity of a lifetime (they are currently trading at $2,231) but the company was in effect tarred with the same brush as the rest of the .com crew and, as a result, in a lot of investor’s eyes became toxic.

Nothing had changed in how Amazon operated, or its potential, between these highs and lows other than sentiment amongst those buying its shares had gone from ridiculously positive to the depths of despair. A bit like the emotions of England fans every four years.

Although not all of the tech sector has seen the same euphoria attach to it this time, there has undoubtedly been speculation in some parts, especially those that boomed during the pandemic. Netflix is down over 75% since November and Peloton from $126 to $13 (90%). Even Tesla, which so far had appeared immune to any sell off, is down 40% from its peak last year (even after this fall it still has a greater market capitalisation than General Motors, Toyota, VW group, BMW and Ford combined so still at very heady heights…).

But these losses pale into insignificance compared to those that ‘invested’ in NFTs, with Exhibit A being the purchaser of the NFT of the first ever tweet ‘just setting up my twttr’, which I wrote about in last spring’s Informing You. Last month the ‘owner’ decided it was time to resell it at auction, hoping to get $50m. The highest bid was just under $10,000, (which is still ridiculous) but as he paid $2.9m that represents a 99.6% loss in little over twelve months. Unsurprisingly he has decided against selling it at this stage.

I am in no doubt that some companies share prices became vastly overvalued and the falls we have seen are more than justified as there was a lot of froth building in the ‘innovation’ part of the market, so this correction is a necessary thing. But as a lot of the selling is via tracker funds and ETFs it does mean that the share prices of other companies are getting dragged down with them.

A number of fund managers we speak to are like kids in a sweet shop as they are able to buy quality companies at prices that would have been unimaginable six months ago. I doubt any will look as a good a buy as Amazon did twenty one years ago, but some will prove very profitable for the patient investor.

Therefore as has been the case with other sell-offs we will look back at this period as a blip and, unlike the English media at the start of the World Cup, a time for investors to keep emotions in check.