“History doesn’t repeat itself, but it often rhymes,” asserted Mark Twain two centuries ago. And it seems that as time goes on, the more rhymes we add, creating what is now a long and complex poem.
Stock market bubbles are one of these rhyming moments.
In March of 2020, we were all forced into isolation in our homes. There were no live sports, no casinos and no live entertainment. As a result, millions of people turned to the stock market for their gambling and entertainment. The bonus income supplied by federal stimulus checks bolstered this trend as many people used those funds to speculate in the stock market.
Social media “influencers” also jumped onboard and used the opportunity to create a buzz among their followers. The happy result of all the flux was that many people who weren’t really familiar with the stock market, managed to make a lot of money.
The illustrious Dave Portnoy, chairman of the sports-betting site Barstool Sports, turned stock trader, preached to his millions of followers on his daily videos that “stocks only go up.” If you’ve lived the stock market for more than a year, you know just how preposterous that statement is. And to be honest, it’s a dangerous attitude. Stocks don’t only go up, and Dave Portnoy knows that. He’s just playing on people’s emotions to get more clicks.
But more concerning to us here at Equinum is the amount of calls and comments we’ve received over the past few weeks:
“You can’t not make money by trading stocks.”
“Only 100% over two years? That’s so slow!”
“My friends make more than $5,000 a week trading stocks. I’m working so hard for a paycheck. Do you think I should leave my job?”
This is only a short list of the outrageous things we’ve heard.
What’s happening today may not be a repeat of history, but it’s definitely part of the rhyme:
In 1999, when the Internet was a new phenomenon, investors bought into dot-com companies with a vengeance. Daily water-cooler conversations revolved around “How much did you make today?” People were quitting their jobs and diving into the game, and we all know how that ended. (Badly!)
Let’s take a look at today’s poem:
Back in the late nineties, over a quick time span of less than three years, the Nasdaq was up more than 467%.
Individual names like Amazon, Qualcomm, and Cisco were on an even crazier ride:
This data isn’t even taking into account the bogus companies who weren’t doing real business and were barely more than an internet façade, like Pets.com, Webvan and Boo.com.
With people trading these names and making thousands, many left their jobs and opted to sit by their E-Trade accounts and trade. Well, that didn’t end well. The Nasdaq plummeted by 78% and some of the individual hot names declined by more than 90% or went out of business completely.
At the time, many traders thought they would hang in there till prices descended, and then make a quick exit. Alas, this is easier said than done. Stocks don’t go up – or down – in a straight line. There are no obvious signs indicating that the top has been hit and that it’s time to sell. There are many “fake-outs” on the way up where it looks like the climb is over, and many dead-cat bounces on the way down where it looks like the bad times are done. The market ebbs and flows.
Let’s take a look at how the market rose during those years:
As you can see, on the way up, there were quite a few large drops, and at least four additional 10% drops. And with each drop, the market “bears” were all over financial media calling an end to this rise.
Now let’s look at the downward market:
Same story. There were a nice number of quick rises in stock prices, and every time that happened, the market “bulls” were all over the media touting that stocks were back!
The point that we’re getting at is that very few people can actually buy and sell the highs and lows in real time.
We’re not saying that investors shouldn’t trade the market at all. We’re just saying that you need to understand what the market risks are. While you may have a friend who’s really good at the game now, if history serves as any guide, we can assume that the nature of today’s game is temporary. Leaving a steady income to get involved in speculation is a risky (read: bad) idea. If you want to take a small portion of your invested assets and speculate, it may well be worthwhile. But the bulk of your assets should be properly invested with a long-term approach in a well-diversified portfolio.
Please don’t read between the lines and conclude that we believe that the market is in a bubble. Some parts of the market may well be in a bubble. The Robinhood trends, Reddit forums and SPACs are definitely in a wild situation. But will this spill over to the larger markets? We’ll have to wait and see.
Feel free to reach out to us at firstname.lastname@example.org to discuss your portfolio.