By Mike Adams
In 1999, during the dot-com frenzy the market was up 44%, and AFC portfolios struggled at just up 4%.
But in 2000, when the NASDAQ dropped over 45%, AFC client accounts were up an average of 38%.
That was followed in 2001, with a 28% increase in AFC portfolios when the NASDAQ dropped another 28%.(1)
I believe we are seeing a similar market today with the ‘magnificent seven’ very overvalued like the Dot-coms. They are at risk of tumbling down while the stocks we own are undervalued and may surge up.
But it seems to be difficult for some to look at the market rushing upward when their portfolio is stagnant. I remember one client who suffered through 1998 and 1999 and grew frustrated that I was not investing in those magnificent Dot-coms. Another financial advisor persuaded him that I was a dinosaur and not in tune with how investing had changed. I explained I understood the internet was a revolutionary technology. I understood that it would change business and industries. But I also wanted companies that could show revenues and earnings. I knew the new way of thinking was that ’brick and mortar’ was dead and the information highway would replace all those companies. But I could not see that some of the old would dry up and go away.
But that client succumbed to the other financial advisor and moved his account in March of 2000. He sold what we had held in his portfolio, so he could put it all into the internet companies.
The best performing stock in our portfolios in 2000-01 was Cooper Tire, one of the so-called “brick and mortar” stocks. It seemed to me in the 1990s even if the internet was revolutionary and I felt it was, that people were still going to buy cars. And those cars were going to need tires. But most on Wall Street did not seem to agree. Cooper Tire had a stock chart between 1989 and 1999 that was so flat it looked like the EKG for a dead person. But in 2000 when the market collapsed Cooper Tire tripled in value. For the 1990s decade, the fundamentals of Cooper Tire looked better and better, but Wall Street was so infatuated with the Dot-coms, the fundamentals did not count.
What that meant for the former client I mentioned above is this: he missed the huge run-up in 1998 and 1999, just in time to invest in the stocks that crashed down in 2000 and 2001. His financial advisor sold the Cooper Tire in his portfolio along with the rest. That was before the run up and the advisor replaced them with the new way of investing in Dot-coms.
Last year and the beginning of 2024, seem remarkably similar to the dot-com craziness. In 1998-99 it was the internet; today it is AI (artificial intelligence). In 1998-99 the market surge was concentrated in the Dot-coms. In 2023 and so far, this year the market surge is concentrated in the “magnificent seven stocks” as they have been nicknamed. In 1998-99 the valuations of the market leading Dot-coms was out of whack with reality. In 2023-24 the valuations of the “magnificent seven” are out of whack with reality.
In 1998-99 the theory was this: “’Brick and mortar’ is dead; the internet would replace all those stores”. It seemed to me that thesis was overdone, and some ‘brick and mortar’ type companies would do well. When the Dot-coms crashed in 2000 and 2001 my thesis proved correct.
In 2022 and 2023 almost all, if not all, economists, and CEOs of companies and all of Wall Street were saying the U.S. economy was headed for a recession. After all, they said, the Fed is raising interest rates, the yield curve is inverted and there is a war which involves most of the developed world. At AFC, we were saying we highly doubt a recession because this time is really different. There were four million more jobs available than there were workers to fill them. We were right and Wall Street was dead wrong. It is a comparable situation to the Dot-coms when Wall Street was saying brick and mortar was dead and the information highway was the right place to be for investments.
In 1998-1999 it was not that I did not see the potential of the internet. Clients with me then remember their portfolios contained and UUNet. Microsoft bought the script from Mosaic and turned that script into Internet Explorer. Microsoft bought UUNet which became their backbone of their move to the internet). But that was early and before the craziness started in the Dot-coms. When stock values were determined by their “real estate of the computer screen” rather than their revenues and net income I moved out of internet stocks in 1997 and missed the crash in 2000.
I am not saying there is a Dot-com type crash coming. But the magnificent seven are overpriced and either they will eventually flatten for a few years, or they will come down. At the same time, the stocks in our portfolios have been maligned by Wall Street and I believe in the longer term, the fundamentals of most of the stocks in our portfolios will do well. There may or may not be the type of stock that could triple in 2024 like Cooper Tire did in 2000. There are several that have that potential.
Our focus is the longer-term. The contract we sign with every client says our goal is to outperform the S&P 500 TR is over the longer-term (5 to 10 years). The market goes up and down and we have been in a down time for several years. I believe that changed in the 4th Quarter of 2023 and will probably continue for the next several years.
We invest with what we believe are favorable fundamentals over the five-year time period. We know there are going to be times when we are out of sync with Wall Street. We also know studies have shown those money managers who try to stay in sync with Wall Street, the so-called closet indexers, will underperform over the longer term.
I stand on my past track record. We did not get caught up in the craziness of the Dot-coms, we have not gotten caught up in the craziness of the magnificent seven, or the recession that never was. We stick with the fundamentals. In the longer-run history has shown fundamentals prevail. I believe that will be proven going forward as well.
Notes
(1) The returns quoted are considered “hypothetical” since they were achieved at Everen – First Union, a major broker-dealer. Broker-dealers during that time prohibited financial advisors from publishing their client returns, but I kept track of my client composite. There is no way to verify because we were not allowed to get a third-party verification. However, my clients during that time can attest to the returns and three of those clients have given testimonials.
Article Written By:
Mike Adams, President & Principal
Adams Financial Concepts LTD
1001 Fourth Ave, Suite 4330, Seattle WA 98011
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