Issue #35 - 3/00

FOR WHAT IT’S WORTH

*“Irrational Exuberance”*		Issue 35
By: Ron Brounes		March 2000

“Greed is good!!!” Or so we were first told by Gordon Gekko in “Wall Street” and then again by Seth Davis in “Boiler Room.” In reality, though “art imitates life,” we don’t have to see these movies to realize that we are living in very greed oriented times. Popular TV shows offer a million dollars to anyone with a decent knowledge of pop culture or insane enough to marry a rich stranger. (I am still waiting for my applications to be accepted.) However, no where is that greed factor more apparent than in the day-to-day “exuberance” of the stock markets. Today there is a new paradigm; “buy and hold” has been transformed into “get rich quick.” Lots of so-called geniuses have been created in the great bull market. Their true test will come when faced with some adverse market conditions. (To many, that means anything less than 20% returns.) Greenspan’s “irrational” comments a few years back were meant to bring the short-term investment mindset down to earth. Instead, the market (Dow Jones) is now several thousand points higher with no end in sight. Today, more investors than ever are able to participate in the rising stock market and are better off because of it. That’s the good news. The bad news is, in many cases, investing has become sheer speculation. The tide will turn one day; it may get ugly.

THE CAUSE OF MY CONCERN

A few days ago, I was chatting with a CPA friend of mine, a pretty intellectual gal with a good mind for numbers and a history of common sense. She informed me that she was making a killing these days in the market. A buddy of hers (real estate broker) had given up his day job to solely track the movements of the stock markets, and was sharing his “hot tips” with his closest friends. He had subscribed to a number of newsletters written by market “gurus” (others who had quit their non-investment jobs six months earlier). My friend had no clue about many of the companies she now owned. Not the products sold; not the services offered; not even the industry they were in. Furthermore, she bought these stocks on margin (borrowed money) in an attempt to hit that homerun. While this allowed her to buy more shares than she may have been able to afford, it also added considerable risk should her stocks suddenly fall out of favor. No chance of that happening, however. They were, after all, recommended by a real estate broker.

Another old college chum apparently made enough money on a few technology issues that he no longer needed to practice law. (Personal injury, I believe, so it’s a good deal for all of us.) Today, he shares his wisdom by circulating a newsletter recapping his daily analyses of the markets, the economy, the global trade picture, even a few movie reviews. To the best of my knowledge, he has no formal training in equity analysis other than the countless hours he spends watching a screen and reading such expert sources as “thestreet.com” and “the motley fool.” In all fairness, his portfolio is doing great (though his movie recommendations are lousy). I am also the “lucky” recipient of another market publication that advises the novice investor about trading options, futures, and other derivative securities. Having significant academic and professional experience in this area, I was curious about the backgrounds of these strategists; I was comforted to learn they had been headhunters (recruiters) just one year ago.

I enjoy watching Wall Street analysts spread their wealth of knowledge on television. To my dismay, these professionals are rarely over 30, yet they discuss the markets like seasoned veterans. In most cases, they were not in the business to experience Black Monday (in 1987, many would have been in high school), and have seen few years when the market was not up double digits. To them, any market pullback is short-term and offers tremendous buying opportunities. Often, they disregard “ancient” valuation methods like PE ratios and show little concern when they see companies with no near-term profit expectations trading with billion dollar market caps. Apparently, as long as a “.com” is attached to the name, the sky is the limit.

GLOOM AND DOOM

Don’t get me wrong. I do not begrudge anyone for their investment successes. On the contrary, I too have experienced some good fortune, and like many others, my portfolio is too heavily weighted on tech issues. (At least I know what businesses the companies are in.) Still I am quite concerned that the “market” has become a self-fulfilling prophesy, a trend that may one day be reversed. The Internet has transformed the economy in ways we could have never imagined. We can now communicate and transact business faster, farther, and more efficiently than ever before. Productivity is up; inflation is down. Individuals make more money to spend on goods and services (and stocks). Businesses earn greater revenues and their stock prices rise. As the markets increase, investors have even more money to spend and the trend continues. Strong economy, high incomes, increased spending, skyrocketing stocks. Because so many tech plays have gone through the roof, impatient investors seek to find that next Dell, AOL, or Qualcomm (+2600% in 1999). They make a buck or two on one issue, double up on the next, borrow/margin to invest even more, quit their jobs to trade full time, and reap the fortunes of the “new” market.

Unfortunately, something will happen to cause the economy to slow: an ill-timed comment by Greenspan, an unexpected rate increase, additional production cuts by OPEC, another Asian contagion, a currency collapse in Latin America, an act of terrorism abroad. Subsequently, incomes will drop; consumer spending will subside. Company revenues (not to mention profits) will decline, stock prices will fall, and investors will panic. They will be forced to pay back their margin and may need to sell other securities to raise cash, thus, causing the market to pull back even further. This time, the lower prices will not represent buying opportunities. Investors will realize that even advancements in technology do not guarantee profits for all Internet players.

I am not advocating you liquidate all positions and hide the proceeds under your mattresses. Just be careful and exercise common sense. At the very least, it may be a good idea to understand your investments and lighten up on that margin. It may not happen tomorrow, next month, or even next year. For the sake of my portfolio (and personal greed), I hope it doesn’t happen for a long time. But inevitably, the “correction” will occur, and may even last longer than a day or two. Not all companies will suffer; not all stocks will crater. The Internet economy will still produce many winners, and in the long run, the markets will be far healthier. But when we start taking investment advice from real estate brokers and headhunters, it may be time to reevaluate. “Greed is good” (to some extent), but remember even Gekko and Davis suffered in the end.

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