On today’s show we’re going to take a short trip through the history books. We’re not going back to Roman times, or ancient Greece. Although there are numerous powerful lessons in history that we could easily apply to today’s environment.
No. On today’s show we’re going back to the fall of 2019, and then we’re going to go back to the fall of the year 1999.
2019 seems like a distant memory. The economy seemed to be humming along nicely. Unemployment was at a historic low. Stock market valuations were considered irrationally high in 2019. We were in the 4thquarter of one of the longest albeit slowest economic expansions on record. Extrapolating continued expansion seemed foolhardy at best.
But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was in 2019 when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is among the highest in history and the economy is fragile to say the least.
Let’s go back to 1999. My company Tundra Semiconductor went public on February 8, 1999 on the Toronto Stock Exchange. The Shares priced at $9.25 but were in such demand that they opened at $13.10 and closed their first day of trading at $13.24.
We were part of that .com euphoria. We didn’t know it. We were too wrapped up in counting our rising daily net worth. At one point, my stock options were worth millions. By March of 2000, the stock hit a high of $78. We were all on top of the world. We were extrapolating to when our stock might be worth $300 to $400 a share. We were absolutely delusional. It was a very powerful and humbling lesson in greed and the dangers of the echo chamber of groupthink. Everyone in the tech industry was rationalizing the valuations. The idea that people would skip the pet food aisle at the grocery store and order their pet food from a separate specialty retailer online was clearly nuts. But those companies still managed to attract stock valuations in the billions.
When the bubble burst, most of that paper wealth, that monopoly money wealth evaporated.
I know of some people who exercised their options, triggering a tax obligation, and then didn’t sell the stock. So they were left with stock that was worth far less that when they exercised. The remaining value wasn’t even enough to pay the tax obligation. Some people had to mortgage their house to pay the tax bill on money they never got to put in their bank account. That’s how confident people were in the valuation of these companies.
I think about an interview with Scott McNealy, former CEO of Sun Microsystems. He said “What were you thinking?”. He was asking this of investors paying a “ridiculous” ten times revenues for his stock at the height of the .com mania.
If you bought Sun Microsystems stock in 1994, you would have seen a 100x increase in value by the time it hit the peak price of $253.
So here we are. Tesla stock is trading at 1600 times trailing 12 month earnings. It has an enterprise value of 802 billion dollars. The stock is trading at 28 times revenue.
Sun Microsystems was a relative bargain at only 10 x revenue. When the world finally woke up and said this is nuts. The stock came back to earth. By 2008, the stock had lost 98% of its value compared with 2000.
$1.3T worth of paper value was wiped out in the .com bubble burst. The resulting economic recession was partly caused by the difficulty that many companies faced in raising capital needed to expand their businesses. It forced contraction in thousands of businesses which resulting in economic contraction.
So here we are. We are in a major bubble. That is as plain as day.