Recently, I came across a blog post from Jesse Felder titled “‘What Were You Thinking?’ Part Deux.”
I’d like to share “the meat” from Mr. Felder’s post as I think it’s very important in putting current U.S. stock market valuations in perspective.
Mr. Felder starts out by sharing a quote from Scott McNeely (Founder and CEO of Sun Microsystems) after the Dotcom bust:
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
Note: Sun Microsystems stock went from $10 in early-1999 to over $60 (and over 10x revenues) back down to under $10. So, CEO McNeely had a front-row seat to the mania and the bust.
Here’s the problem and the relevancy of this quote to today’s market….
In March of 2000 at the absolute peak of the Dotcom bubble, there were 30 stocks within the S&P 500 trading at least at the obscene 10x-revenue level. The Nasdaq then proceeded to lose 3/4ths of its value in the ensuing bust. Today, there are MORE stocks trading above that obscene level (37).
As Jesse points out, this number may grow given that revenues likely fell significantly in this recent quarter.
In summary, there are people investing today with FAR too much risk. They may think they are brilliant investors but they are oblivious to the risks…not only the risk of their portfolio value declining, but, more importantly, they are oblivious to the impact this could have on their ability to retire and stay retired. They are unknowingly jeopardizing their most important financial goals.
One day, many of us will look back on this period and ask, “What were you thinking?”
For my clients, we’ve stress-tested portfolios and used conservative return assumptions within financial projections. This neither means the projections are perfect nor that financial goals are guaranteed, but, certainly, we’ve proactively built in more conservatism and a greater cushion than naively relying on “historical averages.”
If you’re not yet a client, you need to take a long, hard look at your portfolio positioning in the context of your financial goals and ask yourself if you are jeopardizing everything you’ve worked for. Reach out to me to help with that analysis and identifying solutions that could improve your probabilities of success in what is likely to be a difficult decade for U.S. stocks.
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.
This is NOT investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
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