Van’s note: Today is Memorial Day, a market holiday here in the U.S. So we’re bringing readers a special essay from Jeff in lieu of our normal edition of The Bleeding Edge.
For today’s issue, Jeff is trying something different… He’s sharing some of his personal experiences as an investor, including the biggest investing mistake he ever made… and how it shaped his perspective on investing in general.
Read on below…
It’s tough out there…
As I write, all three major U.S. market indices are down double digits this year. The Nasdaq has borne the brunt of the downturn, falling 28% since the start of the year.
Small-capitalization growth stocks have not fared well in this environment. Even the most well-run, large-capitalization companies are down. As I write, Apple, Amazon, and Meta (Facebook) are down 21%, 37%, and 46% respectively. These drawdowns simply don’t make any sense.
When three of the best businesses in modern history are down by double digits like this, we know there is fear in the market.
There’s no short answer for why stocks are selling off like this…
Some of it is inflationary fears. Some of it is being caused by the uncertainty of what the Federal Reserve will, or will not, do next. Some of the selling is being caused by geopolitical uncertainty, or by deleveraging happening with institutional capital.
I – along with my colleague Jason Bodner – have covered each of these topics in the past few weeks. We will continue to do so. Our teams have been working tirelessly to stay on top of all these developments. And we both agree that we have approached deeply oversold conditions.
But I know that type of analysis can only help so much. When we look at our portfolios every day and see an ocean of red, it hurts.
So, for Memorial Day, I’d like to try something different.
I’d like to share some of my personal experiences as an investor. And I’d like to tell you about the biggest investing mistake I ever made… and how it’s shaped my perspective on investing in general.
The Early Years
I purchased my first stock when I was 16 years old. The company was Recoton and I invested a couple of hundred dollars that I had earned from mowing lawns, which was a lot of money to me at the time.
I never looked back. For almost 40 years since, I’ve been an active investor.
Of course, it hasn’t always been a smooth ride. Investing over the long term never is.
I was only 18 at the time of Black Monday, the October 1987 crash that sent the Dow Jones falling by 22% in a single day. I didn’t have much at all in the markets back then, so it really didn’t mean much to me.
Of course, I remember the financial crisis of 2008 and 2009. I’m sure that’s something just about all of us remember. It felt like everything was imploding back then.
But the first big downturn that hurt was the bursting of the Dot Com boom in 2000. At the time, I was in my early 30s. I had been working in high tech – specifically the cable and telecom industry – for about five years.
And when stocks began falling in the spring of 2000 – with no apparent end in sight – it shook me. So I did something that might come as a surprise. For a time, I stepped away entirely from technology investing.
Instead, I focused my attention on precious metals investing. I purchased physical gold and silver. I invested in gold miners and junior exploration companies.
I taught myself about an entirely new industry, which led me even deeper into the world of commodities and trading futures options… It was a fantastic experience – and profitable too. And I did extremely well with my precious metals investments.
But even to this day, I regret my decision at the time…
My Biggest Investing Regret
After the Dot Com bust, stepping back from the rubble seemed like the “smart” thing to do. I mistakenly associated all companies with all the chaos, and fundamentally didn’t understand how to value a company.
Not understanding that meant missing out on once-in-a-lifetime buying opportunities of some of the highest growth companies in history. In hindsight, it was a huge missed opportunity for me, one that I regret deeply.
After all, I was working in the technology industry. I knew which companies would bounce back and deliver incredible returns off the lows. But I didn’t take advantage of the opportunity.
Qualcomm (QCOM) – for instance – was a company I knew very well. It was at the forefront of a new wireless technology, Code Division Multiple Access (CDMA), that was clearly the best technology for increasing traffic on wireless networks. Ironically, I ended up working at Qualcomm years later.
I knew that its technology and semiconductors would be a critical part of the mass adoption of mobile phones, which were in their infancy at the time.
Qualcomm fell to $8, which was nearly an 87% drop from its peak in 2000 during the crash. The stock now trades for over $137, a 1,609% return.
Cisco (CSCO) was another company I was familiar with and invested in. Back in 2000, the stock got way ahead of itself, pushed higher by the promise of the internet reshaping society, with Cisco supplying the essential network infrastructure. The stock would fall by a breathtaking 80% during the crash.
But here’s the thing. The internet did change the world. And Cisco did become a giant in network infrastructure. Cisco now trades for around $43, up 6X from its all-time low of around $7 after the bust.
And then there’s Amazon (AMZN)…
We would probably be hard-pressed to find a more iconic success story than Amazon. Today, the company is a $1 trillion behemoth. It practically “owns” the e-commerce and cloud services industries in the United States.
But 20 years ago, Amazon seemed like an unlikely success story. The stock had crashed more than 90%. The stock would bottom out around $6 in 2001, adjusted for splits. Today, the stock trades for around $2,000.
Of course, for every Qualcomm, there was a Webvan, a grocery-delivery service years ahead of its time that would go bankrupt in 2001. For every Amazon, there was a Pets.com, the poster child for Dot Com exuberance.
Some companies didn’t make it out of that carnage. But even a small investment in the companies that did would have delivered spectacular returns.
But I never had that opportunity. I never let myself have that opportunity. I let the market volatility shake me out of investments I knew could change my life.
And here’s why I retell this story…
A Perspective on Markets
First, I want to assure you, my subscribers, that I do not believe we are in another “Dot Com” scenario. Back then, companies were going public with little more than a vague business plan and a “Dot Com” in their name.
The companies I profile today are not fluffy ideas. The large-capitalization companies found in the pages of The Near Future Report are well-established businesses that are growing their revenues and offering new products and services.
And as for the small-capitalization companies, they are businesses with proven technology products or services with the potential to disrupt entire industries.
Times are very different now… but I know that’s little consolation when we see this type of selling.
I know times like these are stressful. We’re all suffering from the volatility – myself included. But things will absolutely get better.
For starters, many of the technology companies I follow are now trading at valuation multiples so low that I can scarcely believe it.
Block (SQ) – formerly Square – now trades at an enterprise value-to-sales ratio of 3. The only time the company was cheaper was in 2016, the year after the company’s IPO. Not even during the crash of 2020 was the stock this attractive on a valuation basis.
Illumina (ILMN) – the undisputed king of genetic sequencing technology – trades at an EV/Sales of 8.6. The last time the stock traded this cheaply was in 2016, five years ago. Again, even during the 2020 crash, Ilumina never traded this cheaply.
And then there’s Shopify (SHOP), one of the only companies to carve out a niche in e-commerce that Amazon couldn’t fulfill. The stock is off 80% from its highs, and now trades at its lowest valuation since 2016.
I know it can feel like the selling will never end, that things will never get better. We may be tempted to simply walk away. That’s the decision I made more than 20 years ago, and I’ve always regretted it.
The simple truth is that great companies like these will not stay at valuations this low forever. Things will turn around. It may not happen tomorrow, or next week, but it will happen.
So, what should we do in the meantime?
A Stoic’s Guide to Markets
Very few people know this, but I’m a practitioner of the ancient philosophy of Stoicism. At a high level, the Stoics tell us that we should recognize that which is in our control, and that which is not, and then proceed accordingly.
Markets are volatile right now. As much as we’d like to, we can’t control that. But we can control how we respond to this situation.
If we feel ourselves becoming overly anxious looking at the daily swings in the markets, it’s a great idea to take a nice walk with the dog, or do the same with a good friend. We can go work in the garden for a few hours. Perhaps there’s a screen door we’ve been meaning to prepare for weeks.
I always step aside each day to row on my erg or to do some work with kettlebells to maintain and improve my health. It’s hard to go wrong getting some exercise.
Today is Memorial Day in the United States. So – even better – I’d encourage us to go spend time with our friends and family. The markets will still be here when we get back, and so will I, offering my guidance as best I can to readers.
Because we still have so much to look forward to.
Editor, The Bleeding Edge
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