As Of: May 21, 2001
GREED
Act II
It was only last year that everyone felt entitled to make 30%, or 50%, or even triple digit returns on their stock investments. We now call it the tech bubble. The media ridicules the venture capitalists and stock investors who bought into "dot-gones" and "dot-bombs". These people lived in some kind of la la land where they didn't think earnings or P/E ratios or any other fundamental value measurements mattered. These people are ridiculed for being ignorant and greedy.
After a market swoon that sent roughly four trillion dollars to money heaven, here we are, a short time later, poorer and wiser - right? Or are ignorant and greedy people repeating the same mistake all over again? On April 4th of this year, the Standard & Poor's 500 Index hit a low of 1091.99. Just 34 trading days later, the index has closed at 1312.83, more than a 20% increase! But that is nothing compared to the 42.3% increase in the NASDAQ Composite index! Of course these returns pale when compared to individual stocks such as Nokia: up 70%, or Verisign: up 205%, or Finisar: up 268%, and these are just random picks, not the biggest winners.
Yes, the Federal Reserve has lowered interest rates, and that should be good for stocks. But GET REAL! If you listen to the talking heads on CNBC, they keep telling investors that if they don't get in the market, they will be left behind. Sounds like G-R-E-E-D to me. Panic buying because people are afraid of missing the next market move does not suggest objective value investing. With the possible exception of gold and energy, the tech stocks are leading the charge up again. Many of these stocks still have no earnings. Virtually all of them have earnings targets adjusted downward. And very few of them have any real earnings visibility.
Do you really want to own a stock priced on mystically divined earnings somewhere out in 2002 - 2003 when unemployment is going up, gold is going up, the core rate of inflation is holding strong while the Federal Reserve inflates more by lowering interest rates, private debt is high and the foreign trade deficit is growing huge? How can the Dow Jones Average be within 4% of its all-time high while a discussion is raging as to whether we are in or are going in to a recession? Do you really believe the market has discounted all the possible bad news and sees only glorious times ahead?
I believe the explanation for the market's recent action is simple greed (with a little bit of desperation thrown in due to the recent losses that speculators suffered from their last round of greed). You are left with a simple choice: You can believe that I am totally wrong and chase the market like everyone else, or you can wait for the second bubble to break.