Will the year 2015 deliver a speculative bubble reminiscent of 1999?
Will it then be followed by a great bust similar to the Tech Wreck of the early 2000s?
This was the most provocative question raised last week on the airwaves, on the Web and in print.
The answer could have wide-ranging consequences for all investors — not only in tech stocks, but also in turbo-charged sectors like health care, biotechs, REITs, financials, and many more.
The reasons should be obvious: If 2015 brings even half the stock gains we saw in 1999, we’ll see more new millionaires than practically any time in history.
But then, if subsequent years bring just a fraction of the losses investors suffered in 2000-2002, many of those same millionaires could join the ranks of America’s 50 million people still relying on food stamps to make ends meet.
With so much hanging in the balance, my proposal is that we start this conversation early — right now. Then, as the year unfolds, we can come back to it periodically, always asking these four key questions:
- Is 2015 similar to 1999?
- Will it end as badly?
- If so, how can you make money with relative safely as long as the boom lasts? And …
- How can you avoid the dangers when the music stops?
But first, a quick review of the events …
More Stock Market Records Than
At Any Other Time In U.S. History
In 1999, as Internet and technology stocks swept up the nation in an unprecedented euphoria, the tech-heavy Nasdaq composite index catapulted 85.6 percent higher. That was — and still is — the single biggest gain for any major market index in all of U.S. history.
The Dow Jones industrials jumped 25.2 percent. And although that was not its biggest of all time, it capped a five-year period of big yearly gains — the longest double-digit winning streak in history.
Pundits applauded loudly.
Stock market scholars revised their theory of value.
Washington politicians claimed credit for creating an economic Nirvana. One even boasted, incorrectly, that he was the man who virtually invented the Internet.
And investors gobbled it all up in a feeding frenzy that would put piranhas to shame.
Measures of value like price, earnings, and revenues were replaced with talk of the “new paradigm,” “eyeballs” and the mathematically absurd concept that “the way to make money on hopelessly losing products was simply to sell them in bigger volume.”
|Back in 1999, Internet companies had millions of viewers, but they couldn’t figure out how to monetize that resource.|
Big Internet companies built up huge viewership of millions of users, but never quite figured out how to achieve what normal, sane companies care most about — collecting money from them.
As a result, wildly popular tech companies were selling for 100, 200, 500, even 1,000 times earnings. With some companies making less than pennies per share — and many losing money hand over fist — the valuations were so high they passed what I called the “threshold of absurdity.”
Yet, despite the madness — or rather, because of it — investors piled up massive fortunes — at least on paper.
Why The Tech Wreck Destroyed Trillions in Wealth
As the bubble reached a crescendo, I began to protest loudly, and my two companies — Weiss Research and Weiss Ratings — took action boldly.
We helped coin the term “dot-bomb” and took to the airwaves, warning of a great tech stock disaster ahead.
We created a special magazine to promote our newsletter, with headlines that forecast the coming “Internet Apocalypse,” mailing more than a million copies to investors.
And with a prototype of our Weiss Stock Ratings, we gave 98 percent of Nasdaq companies “sell” or “strong sell” ratings (equivalent to Ds and Es on our current rating scale).
At the same time, according to a study by Zacks Investment Research, 99 percent of the ratings issued by major Wall Street firms were either “buy” or, at worst, “hold.”
For investors, the results were an unmitigated disaster:
In 1999, for example, Morgan Stanley Dean Witter analyst Mary Meeker — dubbed “Queen of the Internet” by Barron’s — issued a “buy” rating on Priceline.com at $104 per share. Within 21 months, the stock was toast — selling for $1.50.
Investors who heeded Ms. Meeker’s recommendation would have lost 98 percent of their money, turning a $10,000 mountain of cash into a $144 molehill.
Undaunted, Ms. Meeker also issued “buy” ratings on Yahoo, Amazon.com, Drugstore.com, and Homestore.com. The financial media reported the recommendations with a straight face. Then, Yahoo crashed 97 percent; Amazon.com 95 percent; Drugstore.com 99 percent; and Homestore.com 95.5 percent.
Why did Ms. Meeker recommend those dogs in the first place? And why did Ms. Meeker stubbornly stand by her “buy” ratings even as they crashed 20, 50, 70 percent, and, finally, as much as 99 percent?
One reason was because virtually every one of Ms. Meeker’s “strong buys” was paying Ms. Meeker’s employer — Morgan Stanley Dean Witter — to promote its shares, and because Morgan Stanley rewarded Ms. Meeker for the effort with a $15 million paycheck.
While millions of investors lost their shirts, Morgan Stanley Dean Witter and Mary Meeker, as well as the companies they were promoting, cried all the way to the bank.
An isolated case? Not even close! In 1999, Salomon Smith Barney’s top executives received electrifying news: AT&T was planning to take its giant wireless division public, in what would be the largest Initial Public Offering (IPO) in history.
Naturally, every brokerage firm on Wall Street wanted to do the underwriting for this once-in-a-lifetime IPO, and for good reason: The fees would amount to millions of dollars. But Salomon had an issue.
One of its chief stock analysts, Jack Grubman, had been saying negative things about AT&T for years. A major problem? Not really. By the time Salomon’s hotshots made their pitch to pick up AT&T’s underwriting business, Grubman had miraculously changed his rating to a “buy.”
Mark Kastan of Credit Suisse First Boston liked Winstar almost as much as Grubman did, issuing and reiterating “buy” ratings until the bitter end. No surprise there: Kastan’s firm owned $511 million in Winstar stock.
Separately, in 2000, an analyst at Goldman Sachs oozed 11 gloriously positive ratings on stocks that subsequently smashed investors’ portfolios. He got paid $20 million for his efforts. One of his best performing recommendations of the year was down 71 percent; his worst was down 99.8 percent.
Merrill Lynch’s Henry Blodget gained fame by predicting Amazon.com would hit $400 per share. It was soon selling for under $11. Blodget also predicted that Quokka Sports would hit $1,250 a share. It went bankrupt.
He issued and reissued strong “buy” ratings for Pets.com (went out of business), eToys (lost 95 percent of its value), InfoSpace (shed 92 percent), and Barnes & Nobel.com (lost 84 percent of its value).
Yet even while investors lost billions, Merrill Lynch cleaned up — $100 million on Internet IPOs alone.
In each of these cases, brokerages made millions. The analysts made millions. But investors lost their shirts. All told, from peak to trough, nearly $10 trillion in market value was lost.
Could Something Like This Happen Again?
Yes, of course. But not now. And probably not in the tech sector. Here’s why …
First, in the past decade, Internet companies have learned not only how to attract millions of visitors and users, but also how to monetize that resource.
|Now Internet companies have learned how to attract buyers, with this year’s Cyber Monday shattering records.|
Netflix not only has nearly 60 million subscribers worldwide, it’s charging most of them at least $8.99 per month for the privilege.
Google not only has over one billion users worldwide, it’s making an average of about $14 in ad revenues from each — per quarter.
Online gaming companies in China — like Netease, Inc. and Perfect World — now have more users than the total population of many large countries — they have also developed unique ways to get those users to spend money. They’ve created a massive continuing stream of nickels, dimes and yuan.
Even new upstart companies that distribute free messaging apps for mobile devices — like LINE, Inc. in Japan — are discovering that their users (560 million as of October!) will spend a lot of money when offered the right incentives at the right time.
Second, in the past decade, innovations in technology have broadened far beyond the Internet as we knew it back then:
* Mobile devices have transformed how most of the world’s people interact, learn and spend money. In fact, this year, the official tally of mobile devices globally reached 7.22 billion, exceeding the number of people on the entire planet.
* Human knowledge itself has enjoyed a dramatic upgrade — thanks to a vast global library of free books and materials available to those billions of users … vast databases of user information available to companies that want to sell them stuff … and an entire new universe of data available to science.
As an illustration, this year we bought a database covering all stock options trading in the U.S. over the last ten years. That database alone included 13 trillion unique pieces of information, which, if placed on 3×5″ index cards would stretch from the earth to the sun and back five times.
And that’s just one narrow niche. Companies like Google, Facebook, Twitter and LINE Corp. are collecting that much information — or more — about the Earth and its inhabitants almost daily.
Third, unlike the dot-bombs of yesteryear, many of these giants and startups are cash rich. Quite a few are virtually debt free. And some are actually selling at lower valuations than the non-tech S&P 500 companies.
Fourth, whether biased or not, few investors need Wall Street research or ratings any more. Instead, you are empowered to get your own independent research from companies that have no financial ties to the companies they cover.
For starters, I recommend you check out our Weiss Ratings at www.weisswatchdog.com. We cover not only stocks, but also insurance companies, banks, savings and loans and credit unions.
Our good friends at Zacks also offer independent, objective stock ratings.
And the stock ratings available from Stock Scouter — originally introduced for MS Money by Money and Markets editor Jon Markman — are also free of conflicts of interest.
When you follow our Weiss Ratings, avoid all investments and companies with a grade of D+ or lower and favor those rated B+ or better.
That alone should go a long way towards helping you achieve relative safety during any bubble and some good protection during any subsequent bust.
But ratings alone are rarely enough to protect you from all the dangers — some still lingering from yesteryear, and many new ones that have emerged since.
That’s why we monitor those dangers so carefully. That’s why The New York Times once wrote we were “The first to warn of the dangers and say so unambiguously.” And it’s why, today, our Money and Markets team is so committed to maintaining that track record.
My strong recommendation: Throughout 2015, be sure to stay tuned to our daily alerts — both to learn about profit opportunities that could be very large and to avoid risks that are still largely hidden.
Good luck, God bless and Happy New Year!