Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. - Sir John Templeton
At the bottom of the great recession in the fall of 2008 and early spring of 2009 things looked bleak. Amazon - one of the brightest stars of our current rally along with it's FAANG+M companions (Facebook, Amazon, Apple, Netflix, Google and Microsoft) was down over 60% from it's peak reached ten years earlier during the height of the dot-com boom. Similar stories could be told of the other FAANG+M companies which were publicly traded at the time...
With perfect hindsight picking up shares of these great companies was an incredibly obvious opportunity. The reality is more complex. I actually sat in on some of the first pitches made by a young Jeff Bezos to investors in 1998. Along with Pets.com, Webvan and a number of other money losing internet names was this company which lost LOTS of money selling books online - Amazon. I confess I didn't find the pitch to investors very compelling in either 1998 or at a 60 percent discount in 2009. As a result - I'm still working...
In fairness, Amazon was a tiny, unknown niche player at the time I initially heard their pitch to investors. Their "overnight success" actually took well over a decade - and was almost impossible to divine. During this dot-com period not only were hundreds of companies like Amazon going public (the vast majority of which failed) but investors were also paying incredibly high prices for "high quality, profitable, successful companies" like Intel, Cisco, and QUALCOMM.
Fast forward 21 years... These companies are still profitable and successful - BUT investors who bought a basket of these companies at the height of the internet bubble have negative returns in the the twenty-one years since! The high prices investors paid for future earnings which never materialized now appear foolish in hindsight.
Similarly, ALL of the FAANG+M companies are high quality, profitable and successful companies that have been adored by investors for good reason - most notably in 2020. They are the poster children for a market which has been almost exclusively interested in mega-cap tech companies.
In September of 2020 I wrote that the difference between the valuations of high-flying Wall Street darlings and smaller, profitable and cheap companies was at an All-Time high. But long term investment success historically has less to do with riding the crest of a wave of popularity than buying companies closer to the trough in price. Since September of 2020 these small, cheap, profitable companies have outperformed by OVER 50 percent!
We are currently in a unique dynamic for worldwide capital markets. We are coming out of a pandemic at the same time we have households with record amounts of liquidity and congress has just passed an additional large stimulus. We have pent-up demand and cash is awash in both households and capital markets. My crystal ball is cloudy - but I can confidently say that whatever is in store for the remainder of 2021 will be interesting!
With so much I don't know - what do I know? I know that consistently successful investors pay attention to what price they pay for an asset. If you want excellent returns - you need to be less concerned about what is popular than what price you pay for a $1's worth of current and future earnings.