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Bubble's Pop Still Echoes
Looking back five years at the silliness of the tech bubble is one thing, but living through it was quite another. Plus, what new bubbles are inflating now?
By Steven Goldberg, Contributing Columnist, Kiplinger.com
March 8, 2005
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On March 10, 2000, Nasdaq closed at 5048.62 -- its highest finish ever. Five years later, Nasdaq is still at less than half that level, just under 2100.
The fifth anniversary of the popping of the tech bubble is a perfect time to consider what, if anything, can be learned from the tech bull market and its terrible aftermath.
I had read Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay's classic book about past financial bubbles, years before the tech bull market.
What I marveled at in reading the book was how people could be so stupid. It was obvious that tulips weren't worth what the Dutch paid for them in the 1600s, nor were stocks worth what Americans paid for them in the 1920s. How could people actually get caught up in such silliness?
Swept Up
But it's one thing to read about a bubble. It's quite another to live through one.
Everyone was talking about tech stocks in the late 1990s. Books and articles were being published arguing that there was a "new paradigm" in investing and that the old rules simply didn't apply.
One popular book was Hazardous to Your Wealth: Extraordinary Popular Delusions and the Madness of Mutual Fund Experts. Written by Robert Markman, it purposely mocked Mackay's book and argued that this time truly was different: Large-company growth stocks, especially tech stocks, were simply going to keep going up.
In hindsight, it's obvious that this was all ridiculous. But it didn't feel that way at the time. Nasdaq kept rising, and by not investing in tech stocks, you weren't getting rich like everyone else. People were quitting their jobs to trade stocks. Dow 36,000 was the title of another popular book that argued stocks should rise because people had finally discovered that stocks were a virtually risk-free investment if held for the long term.
I wasn't convinced. Indeed, for the November 1998 issue of Kiplinger's I wrote a piece entitled "Inside the Internet Bubble: The stock frenzy it spawned made a lot of people rich. Now it is bursting."
When that article appeared, Nasdaq was only at 3333. How wrong I was. And that's a key lesson I learned from the bubble: Stocks, or any other investment, can move irrationally for an incredibly long time. When it goes on long enough, it's nearly impossible not to begin to believe that the move will continue.
Tiny Bubbles
I don't think there are any bubbles today that resemble the size and scope of the tech bubble. I certainly hope the tech crash was a once-in-a-generation experience.
But if you look closely, you can see some small bubbles -- bubblettes if you like. You're not going to lose 80% of your money, like the average Nasdaq stock did. But the risks outweigh the rewards.
Junk bonds. High-yielding bonds of low-quality companies are yielding just below 7%. That's less than three percentage points more than the yield on Treasury Bonds -- as narrow as the gap between the two has ever been. It doesn't come near to compensating you for the risks of defaults in junk.
REITs. Real Estate Investment Trusts are trading above the net asset values of the properties they invest in. The Vanguard REIT Index fund has returned an annualized 21% over the past five years. It's time to take some chips off the table.
Treasury bonds. The 10-year Treasury note is yielding 4.3%. That's up from 3.9% just a few weeks ago. Still, it's too low given how strong the economy is and how large the budget and trade deficits are. Stick to intermediate-term tax exempts, such as Fidelity Spartan Municipal Income fund (FLTMX). It yields 3.1% and will lose only about 5% in price if interest rates rise one percentage point.
Will junk, REITs and Treasuries continue to soar for a year, maybe more? Darned if I know. The length of the tech bubble taught me how long the market can behave strangely. But the old rules do apply, and investments do eventually come back to a reasonable semblance of fair value. That's the key takeaway from March 10, 2000.
