Technology stocks have motored higher in 2015, driving the Nasdaq close to 2000's all-time high, which was at the very height of dotcom mania. Are things getting frothy in tech land?
The idea has superficial appeal. The Nasdaq has more than quadrupled since 2009. It’s gained for nine consecutive quarters, a run unseen since 2000.
Last year 71 per cent of initial public offerings (IPOs) were by unprofitable companies, levels only ever seen in 1999 and 2000. A plethora of social media stocks trade at seemingly nonsensical valuations.
However, things are actually very different today. There were 371 technology IPOs in 1999, compared with 53 in 2014. Companies enjoyed an average first-day pop of 71 per cent in 1999; last year, they rose 14 per cent, below the 34-year average. In the first quarter of 2000, 48 IPOs doubled in price on their first day of trading, compared with six in all of 2014.
Today, the froth is in selected internet stocks as well as the biotech sector, where a host of unprofitable firms are attracting heady valuations.
The overall Nasdaq trades in line with its 10-year average, with many of the biggest technology firms – Apple, Microsoft, Google, Oracle, Intel, Cisco – boasting huge cash piles and undemanding multiples.
In short, 2015 is nothing like 1999.
Betting on Buffett
bet hedge fund Protégé Partners $1 million that the S&P 500 would beat a selection of hedge funds over the next 10 years. So far, Buffett is winning easily; the index is up 63 per cent, compared with 19 percent for hedge funds.
Protégé recently went into rationalisation mode, saying hedge funds could not have foreseen zero interest rates and unprecedented Federal Reserve stimulus – a poor excuse, given they are paid to anticipate and react to such moves. Protégé also blamed fees, noting that management and performance fees accounted for more than half of the differential.
Of course, this missed the point – hedge fund fees are simply too high, enriching managers at the expense of investors.
Ironically, Protégé’s defence proves Buffett’s original point: you can’t control the future, but you can control something ignored by too many investors: the fees you pay.
Equity returns often less
For investors with seriously long horizons, equities are a great bet, returning more than 9 per cent annually, or 6-7 per cent after inflation. Right?
Well, kind of. The latest Credit Suisse Global Investment Returns yearbook notes that after inflation, US equities returned 6.5 per cent annually over the last 115 years. In real terms $1 grew to $1,396.
That’s great, but investors should remember the 20th century belonged to the US; investors in other countries were less fortunate.
Excluding the US, global equities saw real annual returns of 4.4 per cent. Real annual returns averaged 4.2 per cent in Ireland, while German and French equities returned just 3.2 per cent annually. Italy did even worse – real returns averaged just 1.9 per cent – while Austrian equities barely beat inflation over the 115-year period.
This doesn’t mean equities aren’t a good long-term bet. After all, stocks beat inflation, bonds and cash in every country with a continuous 115-year history.
However, outsized returns are not a universal phenomenon – far from it.
Diversify, diversify, diversify
The yearbook also shows how dramatically markets have changed over time. In 1900, indices in the UK, Germany and France accounted for half of global market capitalisation, compared to just 13 per cent today. The UK, easily the world’s largest equity market in 1900, is now just a seventh the size of the US market.
Japan, a market minnow in 1900, is now the second largest market, despite its share of global value collapsing from 41 per cent in 1989 to 8 per cent today.
No one knows what markets will look like in the coming decades. That's why it's peculiar that investing legends Warren Buffett and John Bogle both recently advocated an entirely US-focused portfolio. Home bias – the tendency to allocate too much money to your home market – is a dangerous and widespread practice, with more than three-quarters of domestic equity holdings in developed markets held by local investors.
The moral? Diversify, diversify, diversify.
Janitor’s $8m fortune
Don’t underestimate compound interest. Take the late Ronald Read, who was in the news recently after it emerged the ex-janitor amassed an $8 million fortune over his lifetime. Read was a keen investor with a long-term outlook, but he was no investing genius. Rather, he was disciplined, frugal and earned steady returns via his blue-chip holdings.
Time in the market is key. A monthly €300 investment earning 8 per cent annually is worth €287,210 after 25 years; €692,752 after 35 years; €1.593 million after 45 years; €3.591 million after 55 years; and €8.026 million after 65 years. Get saving – quick!