"It's like deja vu - all over again" -Yogi Berra
The Past as Prelude
Hall of Fame baseball player Yogi Berra is know for his unintentional witticisms - some of which are profound while still laughable. One such quote is the observation: "It's like deja vu - all over again".
Much of the current economic, health, social and geo-political maelstrom are without precedent in my lifetime. However, as I contemplate the state and behavior of financial markets recently I am reminded of a similar time from my early career.
During the heady days after the turn of the millennium in early 2000 tech stocks which had been popular prior to the start of the new millennia took off in an ever increasing frothy trajectory.
Of this time Warren Buffett observed:
"It's like Cinderella at the ball. They know that overstaying the festivities - that is continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."
The carnage started in March of 2020. Intel, Cisco, Microsoft, and Corning are the survivors twenty years later from a list of the top 20 performers from the epic party thrown for these tech companies. However, since then only Microsoft has a positive return in the twenty years since they reached their peak during that time where valuations didn't matter.
In that 20+ year time frame, Intel is down over 33% from the festive peak, Cisco down 45%, and Corning down 70%+. Make no mistake, these were good companies then and have been good companies since. However, they were priced in early 2000 with no regard to future cash generation and once the clock struck twelve, investors who still dancing experienced pain. Even Microsoft, which has been a been a card-carrying member of the tech leadership of 2020 had a negative return for investors who bought at the peak for almost seventeen years.
Twenty years later we have the new tech invitees to the ball - led by the likes of Apple - which recently passed 2 TRILLION in market cap (the rough market capitalization of all German public companies). While valuations are arguably less frothy than 20 years ago they are still very high - and again valuation fundamentals haven't mattered this go around.
In the case of Apple - investors are paying 40X earnings for a company which has hardly grown revenues (with decreasing margins) since it was priced at 10X earnings only five years ago! Tesla is a great automobile but is the company really worth 700X trailing earnings or 17X revenues? Or how about Netflix at 82X earnings?
Like 2000 there is nothing which sedates rationality like larges doses of effortless money. I'll leave it to a future newsletter twenty years from now to determine if investors turned into mice or pumpkins by overstaying their welcome.
Meanwhile if you are concerned about your portfolio consider this: The vast majority of companies' stock prices have languished in anonymity just as they did on the sidelines in early 2000. At the peak in March 2000, the price difference as measured in price to book value between large tech leaders and the rest of the market reached an all-time high. A high which in the history of financial markets had only been reached once - until the peak was surpassed in July of this year! In 2000, this meant a huge reversal of fortunes in subsequent years.
While I don't know when valuations will again become worthy of consideration, I do know that cash generation ultimately matters. With 2000 and subsequent years as our template, we know how this ends - just not exactly when...