Market Bubble

[Helen]

The, "why do you LBYM" thread got me thinking about the high tech wreck. I started getting really serious about investing in the late 90's. I had set up my 401k and Roth accounts and my parents had gifted my brother and I some money and stocks at the advice of their CPA.

Boy did I think I was a fast learner ! I cringe when I remember statements I made like, "I should quit my job, I can make more money by researching and investing in stocks !" and "Damn I wish I could buy individual stocks in my 401k !". I am so glad that I didn't have more money to invest. I never tallied up how much money I actually lost, but it was quite a bit.

Boy, the ride up was sure fun. I took $500 and invested it for fun. Within two months the stock I bought was worth $2,000. I sold and bought something else. The stock had a hell of a run up a few weeks later and the $2,000 turned into $40,000 ! I was a believer in the Motley Fool philosophy of buy and hold so I held it all the way back down.

I joined the George Gilder newsletter which gave me access to his website. There were a lot of people who were either retired or close to retirement and had rolled over their 401ks into IRAs and were playing with serious money. Many of them must be back at work now. I can not imagine what it would be like to lose 80% of the money that took 30 years to accumulate. I remember as everything was crashing everyone was still drinking the Kool Aide and God forbid if someone tried to post a wake up call.

How did the market crash impact you and what philosophy did you gain from it ?

I consider the tech wreck as an education and I am lucky I had time to recover from it and most of all that I learned from it. It was a painful education which means it is imprinted into my mind. I now only buy mutual funds and will stick with an asset allocation plan.

 

[audreyh1]

Thank goodness you were talking about the previous market bubble!

At first I expected you to warn us about an imminent burst. There are lots of people warning about valuations right now, but this seems NOTHING like 1999/2000.

Wow - that was quite a thing to witness! I sincerely wonder if I'll ever see anything like that again in my lifetime. Remember 3 down market years in a row! Unprecedented!

And thanks to George Gilder's followers I got to sell MEAD at after a monster price runup - really out of control. It crashed a few weeks thereafter.

We "harvested" most of our tech stocks as they ran wild in 1999-2000. This had been "play money" and the proceeds went to our retirement "travel budget". I retired from the tech industry in 1999, and I knew all these valuations were unprecedented and probably insane.

The only mistake I made was I didn't sell all my CSCO shares in 2000, only some (ouch!). I sold everything else though. Oh - I sold my Qualcomm stock way too soon - oh well. Still made a great profit.

Audrey

 

[wabmester]

Those were interesting times, eh?

I took a hit, but I'd be in much worse shape if I had stayed in the market. Tech still hasn't recovered. Blue chips like MSFT are still at half their peak valuations. Telecom is still toxic waste.

I dodged a bullet by selling most of my stocks in late 1999. I got out because I didn't understand how stocks could get so far beyond traditional measures of value, and I vowed not to get back into stocks until I understood them better.

Now I am very wary of conventional wisdom and in awe of herd behavior. I'm willing to stay in the market and follow the herd up to a point, but not to the point of craziness.

It's hard to know exactly when a herd is headed off a cliff, and I sold several months before the March 2000 cliff, but the take-home lesson for me was:

Don't get greedy. Don't invest in something you don't understand. Take some money off the table if things get so weird that you can't find a rational explanation for the behavior.

 

[CyclingInvestor]

I have always invested by selecting a group of companies with excellent
management (IMO), finances (IMO), stable and steady earnings growth,
and a long history of paying dividends. I then own the best-valued (IMO)
stocks of those companies, selling the higher valued ones for new lower
valued ones when the prices drift.

This led my completely out of Tech by 1997 and out of everything but
REITS by late 1998. While my returns were poor in 98 and 99, they were
good from 2000-2006, when valuations led me out of many REITs and
into mainly large/mid cap blue chips (still no tech).

Returns from the 2000-2006 period allowed me to retire Oct 2006.

Since my retirement is dividend-based, price fluctuations mean nothing
except something to take advantage of if they skew in my favor. My
-9% return in 98-99 while my friends were happily 100% in tech and
doubling their money in a year did not depress me at all, because I was
buying 7-8% yielders growing at 10%/year with top-notch management.

 

[Poundkey]

Back when I had lots of energy I got into a stock trading contest on some obscure site......can't even remember where it was. It was not realistic in the sense that the contest only lasted for 90 days then the winners were announced and a new contest started. It WAS realistic in that you could make any type of trade you wished. You were given 500K in "play money" and did your own research. You could also view what the leaders were investing in.
Long story short.....most of the "winners" were investing in tech stocks.......many of which no longer exist. My research showed PE's in the hundreds...sometimes several hundreds. In some cases no PE was not available because the company had not yet shown a profit. It struck me that people were actually putting REAL money into these also. It turned out to be a valuable lesson in an odd sort of way.
So how did I do?.....seems like my conservitive self made a small gain. The "winners" turned their 500K into 700K or more........and I wonder where they're working this morning as I sit sipping my coffee.....

 

[Moemg]

I had a good percentage of the tech stocks in several Janus funds .As the hype got bigger I got nervous and dumped them for bonds . Many people laughed at me but look who's laughing now .

 

[DRiP Guy]

People say 'hindsight is 20-20', but it didn't take waiting for the crash to see it was coming with the tech run up, IMHO. I watched a lot of the formerly conservative engineering types at work go mad with the gains they were getting, and they began day trading at work (Internet access was getting wide, unfettered at work, not through central IT, on-line brokers getting popular, stock chat boards abounded). They started an "investing" club, and were all expecting to retire rich in two or three years.

They began to ridicule people like me who would not drink the kool aide, and who politely said 'no thanks' to the IPO's they were trying to wrangle into, and the hugely speculative stocks they were buying and selling with little thought. I was told my DRiP approach and reading Buffett was so out of touch with the 'new' realities that I was a sucker.

Once the crash came, I saw that it really hurt quite a few people deeply. A few of them looked like they aged ten years overnight. Many of them had taken their eye off the ball in their professional duties, and some were RIF'ed. A few grimly hung on to try to rebuild their now wasted retirement plans.

I generally am the kind of guy who loves board games and competition and will gloat and tease over them. Well, these guys who had teased me and made fun of my conservatism were so sad that I never said a word about investing to any of them, and counted myself lucky to take only the losses I had, which fortunately only took about two years to recover. Some of these guys were literally ruined.

A very cautionary tale and valuable life experience, IMHO.

 

[W2R]

I was putting the maximum into my 401K (and paying off debts, and saving the rest to buy a house). I had no taxable investments at that time, but only because I wanted a house so badly and needed a down payment. Thank heavens for a strong "nesting instinct" as my mother would put it.

With my company match and a conservative asset allocation I managed to keep about what I put into the 401K, so I told myself that at least I wasn't losing anything!

I gained a healthy skepticism about investing from that experience. My retirement planning involves some really nasty, dark possible scenarios that otherwise might have seemed too pessimistic for me.

 

[unclemick]

Well - let's see:

Having been reasonably stupid too many times to enumerate in the 1960's, 70's, and 80's - by the time I was laid off in 1993, even this block head no longer tryed to kick the football held by 'Lucy'. The nail in the coffin was 1994's Bogle on Mutual Funds and VG Lifestrategy moderate became my lead sled dog.

Couldn't go cold turkey on slice and dice - still held some side bets on REIT Index, Small Cap value, High Yield Corp and a modest piss pot of dividend type DRIP stocks.

Held the course thru 1999 - 2005 and admired my 'true grit' as I was down -16.5% during one quarter.

Now with even more religion - have gone to age dated Target Retirement mostly(85%).

Not central to my retirement - hormone wise the urge to putz still requires 15% in dividend and DRIP type stocks.

heh heh heh - The back test calculation on VG's site shows a -18.6% dip for my portfolio should a 70's type worst case appear. ? stay the course? and endure the pucker factor.

 

[REWahoo]

How did the market crash impact you and what philosophy did you gain from it ?

Interesting question. Short answers: “not very much” and “keep on doing what you’ve been doing”.

Throughout the 90’s I stuck with a conservative allocation of mutual funds (no high tech) and I’ve never been much of an investor in individual stocks. As a result, I was very fortunate in how I weathered the “de-bubbling” that took place at the turn of the millennium. 90+% of our nest egg was in our 401(k) accounts, and only DW’s 401(k) had company stock in it. Thankfully she worked for a boring insurance firm not a high-tech company, so the downturn didn’t have a huge impact on her account balance.

I will confess to doing some market timing with the funds in my 401(k) in late 1999. The discomfort level I had with tech run-up was a factor in the moves I made, but not the key driver. I was more concerned about what impact all the goofy Y2K scare tactics might have on the market. So, in October of 99 I moved from an 80/20 allocation to 35/65, and then gradually reallocated to 60/40 in 02-03. That brilliant move dumb luck allowed me to FIRE 5 years later, unlike a co worker who I had been competing with to see who could FIRE first.

The co worker (“Ed”) and I are the same age, have two children the same age and were in similar positions in the company. In the mid-90’s we got into an informal competition to see who could do the best job of building their nest egg. (BTW, Ed was the only person outside DW and this forum with whom I’ve ever been willing/able to discuss my finances in detail.) Our retirement accounts were roughly the same, and we had a great time over the course of 10 or so years comparing notes every couple of months.

Ed was the hare, I was the tortoise. He tore me a new one in the late 90’s, allocating most of his 401(k) to the most aggressive funds available. He also bought Lucent, Cisco, and many of the other usual suspects you all remember well from those days. Meanwhile, I stuck with my asset allocation, and enjoyed a much more gradual but considerably less lofty ride up the market roller coaster.

When I told him I was going conservative in October of 99, he laughed and said, “Heck, you’re already conservative! Now’s your opportunity to make some real money. I’m letting mine ride!” At that time his portfolio had grown to 160% of mine. Of course he took a beating over the next couple of years and at the end of 2003 his portfolio had dropped to 55% of where I was.

I FIREd in 2005 and Ed is still working. In his defense, he’s done many other things right and been on the good end of some breaks and it looks like he will get a very nice stock and bonus package when he does retire probably at age 62. Ed will likely end up with a nest egg larger than mine…unless he gets bitten by the real estate he’s purchased (a primary residence and weekend lake house in TX, and a house on a golf course in FL…all three mortgaged). Yes, he has a little problem with the LBYM part of the equation.

 

[maddythebeagle]

Valuable lesson...I didnt get hyped into the tech stocks except a few in a taxable account...and sold them in 1999 for a house remodeling project that I wanted more cash for...mostly boring drip stocks from the start and index funds in the work plan...but hey, even those got out of line....

 

[audreyh1]

How did the market crash impact you and what philosophy did you gain from it ?

It taught me that there is usually a big run up before a major crash/bear market. There is usually a big run up after the crash. Obviously the whole thing can take several years to play out.

You had better develop a philosophy that allows you to stay invested. If you spend too much time worrying about valuations, you'll miss the run up before the crash. If you get freaked out during the crash and pull your money out you'll miss the run up after the crash. It never really looks safe to be in the market, but the scarier the investing environment, the "safer" it usually is.

Asset allocation is my strategy for staying invested. I handled the 1999 to present cycle very well. Admittedly I was DCAing a lump sum into the market 2000-2002, and by late 2002 I was fully invested. So I got lucky in that sense. But 2003 was a huge recovery, made me whole+, and I think a lot of other people who had diversified portfolios that included fixed income were made whole with the 2003 recovery. It was really only the folks who held mostly S&P500 Index or aggressive growth funds who never recovered. So the period clearly demonstrated the value of being diversified.

Audrey

 

[cute fuzzy bunny]

That whole cycle cemented the ideas of diversification and rebalancing, and also taught me that the "no market timing" rule does have an exception when the markets have a few cocktails and start buying them for the investors.

 

[Zathras]

What CFB said

 

[runchman]

I now only buy mutual funds and will stick with an asset allocation plan.

This is exactly what I also took away from that time period.

Wasn't it fun while it lasted though? It was all we talked about in the office, how great our tech stocks were doing.

Then after the implosion, suddenly nobody talks about investing at all anymore !

My wife's rollover 401k, which I of course had in tech stocks, sank from ~ 100k to around 30k. Ouuuch !

Fortunately this was an event that happened relatively early in my investing career. Can't imagine being one of those near-retirement people that experienced this loss, that would be just damn depressing.

- John

 

[FinanceDude]

It wasn't a MARKET bubble, it was a TECH bubble, but you'd never know it from the hand-wringing at CNBC in those "dark days". However, I avoided about 99% of the hoopla by remembering back to my business school days, where my finance professors used to laugh if anyone suggested a business could have a high PE for any length of time............

 

[Texas Proud]

It wasn't a MARKET bubble, it was a TECH bubble, but you'd never know it from the hand-wringing at CNBC in those "dark days". However, I avoided about 99% of the hoopla by remembering back to my business school days, where my finance professors used to laugh if anyone suggested a business could have a high PE for any length of time............

Its according to what you mean by any length of time.... Microsoft had a very high PE for a very long time...

But I agree with what you said.... and am amazed at what some people will buy...

 

[Nords]

Don't get greedy. Don't invest in something you don't understand. Take some money off the table if things get so weird that you can't find a rational explanation for the behavior.

When RedHat was a startup, a shipmate used to write software and post it on their open-source website. It was a hobby.

When RedHat allocated IPO shares they offered their "developers" a chance to participate. This Navy E-6 with about eight years of service essentially begged his mother (a widow) for all the money she could put into it. He came up with about $10K of his own money and she put in a "I have no idea what size of Red Hat I wear but I love my son" $40K.

The stock easily tripled at the open, but that night he told her he'd lost it all. Musta been a lot of family social dynamics getting a good hard exorcism there.

He cashed them out as soon as he could. Shortly afterward he developed irritable bowel syndrome and a couple years later was medically retired. A ER electrician in his 30s who writes a lot of open-source software-- I wonder what he's doing with his time now?

 

[justin]

I consider the tech wreck as an education and I am lucky I had time to recover from it and most of all that I learned from it. It was a painful education which means it is imprinted into my mind. I now only buy mutual funds and will stick with an asset allocation plan.

My sentiments exactly. Luckily I only had a small five figure portfolio during the tech bubble. I was 19-20 years old, in college, but making a very good living (for a college student) teaching, researching, and getting tons of grants and scholarships (even though tuition was dirt cheap). I put all of my scholarship money and earnings into the market, and borrowed to the max on margin. Needless to say, I lost pretty much all of it (90%) and had to maintain margin calls on the way down. I did keep about half of my money in rather conservative mutual funds that only lost 30% or so in the downturn (they came back and are up 50% now I think). Total education to the "school of investing" - probably around $20,000. Now I have an asset allocation plan and invest in mutual funds only.

Except the ISM I own, which is an acceptable risk IMHO.

Glad I learned that difficult lesson early while the stakes were small.

 

[rockyj]

How did the market crash impact you and what philosophy did you gain from it ?
I consider the tech wreck as an education and I am lucky I had time to recover from it and most of all that I learned from it.

Yeah the late nineties were a fun time. I was a novice investor - regular visitor to Motley Fool website, who at the time were boasting about the almost foolproof "Foolish Four" and practically guaranteed 20% annual returns. I "diversified" into several sector funs from Invesco - mostly thinking I could pick winners based on intuition and consistent past records. One year Invesco Strategic Technology and Strategic Telecommunications both recorded identical and ungodly returns (something like 143% if I recall correctly - at which point I hope I recognized that they were holding almost identical portfolios and not offering any diversification at all). But boy could I pick 'em. Then of course the crash. Meanwhile another of my holdings, Dodge and Cox Stock fund (a more diversified large-cap fund, about 20% foreign, self-proclaimed value orientation) that I had been somewhat frustrated with due to it's laggard returns compared with my star choices, generally churned along and suffered much less of hit when the time came, and has continued to churn along since, appreciating nicely. So what I learned from that time and those specifc examples was

1) if I ever see gains like 143% again in an individual holding, it's time to immediately take at least much of that gain out of that holding and put it somewhere different - the beginnings of understanding asset allocation and rebalancing.

2) know what's in your funds - different fund names don't make diversification - different holdings do. Morningstar's fund x-ray can help you do that.

3) picking the winners is not nearly as easy as it initially seems in a bull market when nearly everyone's a winner. We have been in a bull market the last couple of years.

4) long-term average respectable gains from a more diversified portfolio will be just fine with me - thank you.

Pretty basic stuff - but initially learned through experience - fortunately relatively early in my investment career.
So now I read with knowing nods many of the classics frequently mentioned here to reinforce and refine that diversified buy and hold orientation, after which I perhaps tinker a bit with asset allocations with my new money so that I feel like I'm doing something useful - but not enough to do anything really damaging.

 

[grumpy]

During the 90's I was busily accumulating substantial holdings in blue chip large cap dividend paying stocks through DRIP plans and maxing out contributions into TSP and IRA accounts weighted toward large cap value funds. Many of my NASA coworkers were touting the big profits they were making trading tech stocks and pink sheet stocks. We had quite a few debates about the reality of reported profits vs. paying out of dividends. These guys dissed me for being so conservative in my investment approach. A few said something like "if the market continues like this another two years I can retire." Well, I retired in 2002 at age 55 and most of them are still working. The net effect of the market bubble for me was that for a few years my net worth stayed about level - the market loses were offset by the new investments I made. I'm not sure why I was able to resist the siren song of the runaway tech market but I am glad I did.

Grumpy

 

[TromboneAl]

I got caught up in the Y2K hype, convinced that even if Y2K wasn't a big problem, that people would take money out of the market just before 1/1/2000. So during 1999 I DCA'd a lot of stock money into bond mutual funds.

Although Y2K didn't crash the market, and I was DCA'ing back into stocks starting in Jan 2000, I still had a good bit more than usual in bonds when the bubble burst.

Stupid but lucky.

That was also my last attempt at market timing.

 

[Meadbh]

My wife's rollover 401k, which I of course had in tech stocks, sank from ~ 100k to around 30k. Ouuuch ! Fortunately this was an event that happened relatively early in my investing career.

Your investing career? What did your wife think about this? How did it make her feel about you? Has she now taken the reins of her own investments?

 

[FinanceDude]

Your investing career? What did your wife think about this? How did it make her feel about you? Has she now taken the reins of her own investments?

Must have been an interesting conversation when he showed her the $30K...........

I remember my wife's rollover IRA was in funds, but a lot in growth stocks. For NO OTHER REASON than gut instinct, in December of 1999, I allocated a large part of her growth funds to value, and put 20% of the portoflio in bonds. She of course was quite upset with me at the time..............

A YEAR LATER, she began asking "why didn't you put MORE into bonds"..........what a great moment of getting her to understand.........

 

[cute fuzzy bunny]

Its kinda fun watching this stuff through a 'buffer'. My wife regularly starts up a brief discussion during one of our walks thats something like "so...everyone at work is buying gold...do we have any?" In this case, we did until about two weeks before she asked.

Seems a good barometer so far. Almost everything she brings up is what I just sold, and thats not long before it drops like a rock. So far the only exception is REITS, which I sold a year ago.

But like Bill Gross waiting for the dow to finally hit 5000, I think reits day is soon to end