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Year 2000 Lessons
After a professional football game the players and
the coach sit down and go over the game.
They watch the films.
They discuss what worked, and what didn’t.
It’s important for them to figure out how to proceed.
They look at what needs fixing and how that is going
to happen. The team has a goal that they constantly keep in the forefront
of their minds: win every game and make sure you get to the
Super Bowl. Achieving
the goal isn’t easy, there is opposition, but it can be accomplished
if they constantly practice what they know.
Doctors carry on the same type of review every time
a patient dies under their care. They meet to identify what worked and what didn’t, then they
try to develop a strategy that will better accomplish their
goal of providing the best patient care.
Investors are similar to the sport teams and doctors,
they have investing goals and they strive to increase their
account balance as much as possible.
But something went wrong in 2000.
Many investors lost money.
What can we learn if we do a postmortem on the year
2000?
Looking
back it’s obvious many investors let their emotions get ahead
of their brains. “Irrational
exuberance” was a fairly accurate description of what was
happening. Going
forward: we need to keep our emotions in check and rely on
logic and intellect.
Beginning in late 1999 market pundits and commentators
kept saying the markets had run up significantly and were
ready for a correction.
We need to listen carefully to the rumblings that
go on in the financial media. When we hear the same
thing many times a day we need to carefully review what is
being said. Certain
market analyst’s opinions carry a lot of weight and shouldn’t
be ignored. Abby
Joseph Cohen is one of those pundits you have to listen to.
In the off chance you don’t like her, what she says,
or Goldman Sachs who she works for: what she says moves the
market. She says she picked the market top correctly in March 2000.
Actually she helped cause the top when she publicly
reduced the equity allocation for the firm’s clients.
A handful of notable market strategists at the largest
brokerage firms publicly announced a re-allocation of their
model portfolios, slightly reducing their equities holdings
even ahead of Abby Joseph Cohen.
Their clients listened and so did a larger number of
other investors. So
when the top strategists publicly yell “fire”, don’t be the
last one to the door.
Many investors had every cent in their possession in
the market, with much of it in the high tech and Internet
sectors. When
the markets sold off there were no extra funds available to
pay margin calls and there certainly weren’t any funds in
reserve to selectively pick up bargain stocks selling at a
50-70% discount off of their highs.
In the future we need to keep some funds in
reserve. When
you buy a stock you’re buying a stream of future earnings.
If the projected earnings of one company is greater
than another, the one with the strongest earnings going forward
will have the strongest value in a crazy market.
No matter how good the concept is or how bright the
future looks, a company with no earnings and only a chance
of future earnings has only a chance of surviving when the
market declines and the earnings are closely scrutinized.
When looked at closely, stocks with a Price-to-Earnings
ratio in the stratosphere will fall like a soufflé in an oven
on a bumpy freight train.
The lesson most investors learned best from their
year 2000 experience is the need to use stops to reduce losses
and to hold on to gains.
Many investors would have kept most of their gains
from 1999 if they had used a trailing stop placed 5-15 percent
below their rising share price. Stops, whether placed with a brokerage firm or kept track off
mentally are a good way to get out of a losing position with
most of your account balance left to work with in the future. It only takes a modest 11 percent gain to recoup from a stop
placed 10 percent below a stock purchase that has gone bad,
but it takes a monumental 100-percent gain to recoup a 50
percent loss. The
year 2000 had many lessons to teach us and hopefully we were
good student and are better equipped to push on toward our
goals.
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