I often hear people say that the stock market today is not like the dot com bubble of 2000 because today the expensive stocks are large companies with real earnings.
To that I say:
Firstly, there are plenty of companies today which don't make a profit and also some which make a small profit and are priced on extremely high valuations.
Secondly, even big very profitable companies can still go down in value. Look at slide 1. Many of the companies which lost investors a lot of money when the dot com bubble burst were large established profitable companies. Investors just got over excited about their near term future earnings growth potential.
Slide 2 shows that valuations today are likewise elevated for many large companies.
Slide 3 reminds us how much investors in some famous companies lost during the bursting of the dot com bubble.
Now you can argue that Microsoft was a good investment even in 2000. Slide 4. But it was a much better investment in 2009. When people say you're investing for the long term, ask yourself, HOW LONG?
And some of the biggest stocks that you could have bought in 2000, still haven't recovered. Slide 5. If you had to just buy and hold in 2000, you wanted to own Apple and Amazon. But they were small companies back then. A passive investor would have owned far more Cisco and Intel.
Google/Alphabet and Facebook/Meta weren't publicly listed companies in 2000. You'd have been more likely to own publicly listed Yahoo in 2000.
And what if a challenger comes along? Look at Nokia in 2000 and 2007 on slide 6. The iPhone was launched in 2007. Mobile phones did change the world but you had to invest in the right stocks at the right time.
Bubbles are nothing new. You've all heard of the Tulip bubble. Slide 7.
Then there was the Mississippi company bubble in France, the South Sea company bubble in England. Slides 8 and 9. Even Isaac Newton's wealth didn't prove immune to the financial gravity of the latter. And don't forget the Dutch East India company bubble. Slide 10.
But surely AI is a transformative technology? Sure. I don't disagree.
But so was the railway in the 19th century, the radio in the 1920s and Xerox in the 1970s. Slides 11-14. The new technologies were a big success, just like the internet but all were accompanied by bubbles, which eventually burst.
A (polaroid) picture is worth a thousand words. Slide 15.
Then of course there were the bubbles in Japan in the late 80s and in China in 2007. Slide 16 and 17.
I don't have space to list all the numerous property and associated financial sector bubbles or the commodity price bubbles. But 2007 is an obvious example of both.
In short, history teaches us that every so often some investors get overexcited, others fear missing out and benchmarked investors either have to or feel they have to own the expensive stocks, no matter the valuation.
Until the music stops.
Shorting bubbles is dangerous. So is being overexposed.