Wayne and Gary had the worst suits of any company management team I’d ever met.
Wayne was the CEO and had a green suit and a mullet hairstyle. Gary was the CFO and had a brown suit.
They mismanaged a loss-making internet company that, at its peak, was briefly valued by the stock market at ~£1 billion in the dotcom boom in 2000.
Names have been changed to protect the guilty so let’s call the company “Internet-PoS.com” (IPOS).
It was 1999, I was a junior working in corporate finance and I was in a meeting with Wayne, Gary and my boss.
Shit flows downhill and I was at the bottom. My job was to pour the tea / coffee, carry the MD’s briefcase and turn whatever fiction resulted from the meeting into an excel spreadsheet / powerpoint slides. It’s a dirty job but someone’s gotta do it.
Fast forward three years to 2002. My career had
gone tits up temporarily stalled. The stock market had been falling for 2 years and so had my portfolio. I was looking for a way to go short and make money from prices going down. But which company to short?
I then remembered IPOS which was fast burning through its cash pile. I did some research. It was only a matter of time before it went bust.
I opened a spread-betting account, put on my short position and waited. Unfortunately the price went UP and my position went loss-making. I took to the internet and posted on an internet bulletin board that IPOS would be bust in 3 months time to anyone that would listen.
Unfortunately no one was listening. It’s a feeling that I’ve gotten used to over the years and one which stood me in good stead when I started blogging.
Shortly after that the stock spiked up. It was at that point that I fully realised that the market could stay irrational longer than I could stay solvent.
If you buy (go long) a stock, you can only lose your purchase amount. But when you go short via spreadbetting (or borrowing a stock to sell) your potential loss is unlimited as there is no upper limit on a share price. Fearing the prospect of unlimited loss, I closed out the position and took my loss on the chin.
Three months later IPOS went bust and the stock went to zero.
Moral of the story: you can be dead right about the facts, you can correctly predict the future and still lose money trading.
This followed the Gamestop story, Bitcoin frenzy plus several other signs of speculative excess. I said then that, whilst they don’t ring a bell at the top of the market, a major market crash was coming and that we were somewhere near the top of the bull market that has run since March 2009.
I could of course be wrong. The bull market could run longer. Even then the eventual reversal process could take weeks, months or years to play out. It could be a sudden blowout, a flash crash like Q1 2020 or a slow puncture like 2000-03 where the market falls slowly over several years.
Let’s define our terms. When I’m talking about high valuations and speculative excess, I’m talking about US large cap equities, the FAANGs, big data, Artificial Intelligence, biotech, robotics, remote working, anything with network effects, social media, platforms for the gig economy, de-centralisation and blockchain. These are the stocks that rocked in 2020:
If you own a global tracker fund such as the Vanguard Global All Cap Index fund, you own over 6,000 different companies in all industry sectors across the world.
If we’re going into dotcom bust 2.0 (version 1.0 was 2000-2003) then a lot of those different companies should offset / mitigate the stuff that’s going down. That’s the beauty of diversification.
What to do? For most people, it’s best to keep calm and carry on. Monthly $/£/€ cost averaging is your friend.
Staying out of the stock market altogether would be like leaving Glastonbury on a sunny Saturday afternoon just because a few people started drinking the Kool Aid (or should that be cider?) too early. It was always gonna happen and we shouldn’t let that spoil the rest of our weekend.
If we step back and get some perspective, we are in a time of spectacular technological progress. The pandemic accelerated this. The fact that we created a vaccine in a few months should alert you to the amazing scientific progress going on right now.
Over the long term, human progress drives long term stock market returns. Technological progress is the signal, market volatility is the noise. In the short term, the noise drowns out the signal. It’s never a smooth upward journey. Random noise is, by definition, unpredictable.
As someone smarter than me once said: there are only 2 types of market timers: those that can’t do it and those that don’t know they can’t do it. So why, you may ask, am I predicting a bear market when I say that market timing is impossible?
Because forewarned is forearmed. The stock market is a roller coaster ride and it’s time to buckle up and strap in. There’s a simple way to avoid losses and that is to buy and hold forever.
The market will test our resolve in the months ahead. Are you ready for that?
The Escape Manual is explained * here *