Owning a business often means that most of your net worth is illiquid and inaccessible for many years, perhaps forever. That has certainly been true in my case. We’ve been diligent about reinvesting in our business’s growth, saving in our retirement accounts, paying for college tuition, and making sure we’re generally doing all the things you’re supposed to do for long-term savings. However, that doesn’t leave a lot left over, and I’ve neglected my brokerage account for many years. Nevertheless, I was recently able to set aside a chunk of non-retirement money, and just a few weeks ago, I invested it all into stocks.
That may seem a little crazy with stocks trading at all-time highs and the economy potentially slowing down. Even worse, there are plenty of signs that the stock market could be in a bubble. Current stock market valuations are, in some instances, even higher than they were during the peak of the dot-com boom. There are eerie parallels to the 1990s, particularly with respect to AI stocks and how their soaring prices mirror what happened with internet stocks twenty-five years ago.
Witness Oracle’s recent announcement that its cloud infrastructure revenue would jump from $10 billion last year to an expected $144 billion within four years. The stock rose 36% that day. That is reminiscent of the expected impact that the internet would have on the business world and global economy back in the 1990s. And while the internet did transform our daily lives and the way we do business, it didn’t necessarily live up to the corporate projections of the day. In fact, some stocks are still trading below their peaks in the 1990s (I’m looking at you, Cisco Systems). Is it possible that valuations have risen too far today, even for very solid companies?
There are other parallels as well. Risk-taking in speculative assets is off the charts, and I’m not even talking about cryptocurrencies. Pokémon cards, for instance, have appreciated by 3,821% since 2004, according to a recent article in the Wall Street Journal. That’s roughly double what you would have earned investing with that hack Warren Buffett over the same period. This type of mania mirrors the 1990s run-up in Beanie Babies, where intense trading led to stratospheric prices (Large Wallace and his Squad were once reportedly worth $600,000). While Bitcoin’s potential is debatable, I think most of us can agree that Pokémon cards are unlikely to maintain the same level of annual returns in the future. Remember reading about tulip bulbs in the 1600s?
Despite signs of crazy times, stock market bubbles have been historically rare. William Goetzmann, a Yale finance professor, recently found that despite some notable stock market booms and busts (Black Monday in 1929, the 20% one-day drop in 1987, and the 78% collapse in the NASDAQ starting in 2000), stock bubbles, defined by his measures, have occurred only one half of 1% of the time. This means that while stocks are not always rising, they are generally not in crisis mode.
And even when we are in a bubble, it is hard to know what stage we’re at, which could make all the difference. When I started on Wall Street in 1996, the market was already trading at valuations that many smart, experienced strategists, analysts, and economists considered crazy, leading them to get out of stocks and move to cash. However, the stock market subsequently rose by about 20% each year for the next four years. When the expected downturn arrived in 2000, the collapse never took the market down as low as its 1996 levels. Those who went to cash ended up with less money than those who simply rode through the downturn, even though the 1990s were a bubble period.
That is really why I invested my cash recently, despite all these troubling signs. No one, not even the brightest minds on Wall Street, can accurately predict the market’s direction at any given point in time. What we do know is that stocks, driven by a robust domestic economy, tend to rise on average and over time. Since I won’t need this money for a long time (I hope), the rational strategy was to hold my nose and jump in.
Maybe it would have been better to average the cash into the stock market to protect against buying on just the wrong day. That would certainly feel more comfortable, however, it is rarely successful. It really is more of a psychological hedge that makes us feel better, but because the stock market mostly moves higher over time, it generally results in lower returns.
In fact, the entire investment game is arguably more about psychology than practicality. The practical application is relatively easy, but the psychological element is difficult. We worry about selling out ahead of the next crash, hoarding cash to avoid regret, or changing strategies when underperforming. While most clients we work with have diversified portfolios and ample money to weather a downturn, the worry, second-guessing, and regret caused by volatility can be tough to live with.
I am subject to those same psychological feelings, but I try to look at the data and force myself to follow rules that ensure I act “rationally.” The data consistently shows that stocks grow over time, and attempting to time entry points is a fool’s errand. Therefore, the rational course of action was to invest my cash all at once, secure in the knowledge that over the long term, it will grow. We’ll know soon enough if it was the right decision.
**Disclaimer
Armbruster Capital Management’s views as portrayed in this post are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks; the value of your investment will fluctuate over time, and you may gain or lose money. Past performance is no guarantee of future results.