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I have to believe that we learn from experience. Otherwise the returns from getting older are rather meager. (Yes, I know I get better looking each year. But enough about me.)
But with 10 years this month of Jubak's Journal under my belt, I can tell you that just having more experience isn't enough. It's as easy to make investing mistakes -- expensive mistakes -- by drawing the wrong conclusions from experience as it is from ignorance.
For example, I think a lot of experienced investors lost more money than they needed to when the market bubble burst in 2000 because they were led astray by their experience of the Crash of 1987. I know I did.
That's important, because investors are facing two big, but very different, kinds of market downturns in the next decade. And if you don't want to relive the pain of 2000, you'd better get down cold the difference between a crash, like the one now looming in the Shanghai stock market, and a bear market, like the demographic bear likely to claw away at financial returns after 2015 or so.
Those were the days
Those of you who've been around for the long haul with Jubak's Journal will remember that I started this column -- and the related Jubak's Picks stock portfolio -- in May of 1997, just in time to catch the technology bull by the horns. (For the entire 10-year long haul, Jubak's Picks is up 334% as of May 23, an annualized average return of 15.2%.)I really got rolling in the heady days of 1999, when you couldn't lose in the stock market as long as you picked a technology stock. The Nasdaq Composite Index ($COMPX) returned 86% in 1999, but Jubak's Picks did even better, up 101% in that year.
But by the early part of 2000, it was clear to me and many investors that this was too good to last. Big gains always make me nervous, and boy was I nervous as 2000 began. I remember sitting at my desk at home reading John Rothchild's 1998 "The Bear Book" sometime early in 2000. As spring approached, I started to sell some positions. It wasn't so much a market call -- although I did write a column about bear markets at about this time -- as a desire to turn some paper gains into cash.
Since I've got a record of every buy, sell, dividend and split in the 10 years of Jubak's Picks, I can tell you exactly what I sold.
Out went Broadcom (BRCM, news, msgs) on Jan. 21, 2000, with a 794% return since my buy on June 29, 1998. Out went Metromedia Fiber, a stock no longer with us, on March 7, 2000, with a 149% gain since my buy on June 25, 1999.
And then, while I was still selling, the bottom fell out. From an all-time high of 5,049 on March 10, 2000, the Nasdaq Composite plunged to 3,221 on April 14. And kept on falling.
Following Rothchild's advice to sell early into a bear market, I kept selling. Out went National Semiconductor (NSM, news, msgs) on April 28 -- my 47% gain since Dec. 14, 1999, wasn't as good as the 101% I was showing at the high, but hey, it seemed pretty good amid the carnage. Same with Vitesse Semiconductor (VTSS, news, msgs): I sold on May 3, 2000, with a 33% gain -- down from a 110% gain -- since my Oct. 29, 1999, buy.
So far so good, right?
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Then I started to fight the last war, and the bottom fell out of my portfolio.
You see, I'd been through a bear market before -- or at least, I thought I had. In October of 1987, the stock market crashed. The Nasdaq Composite index fell from 453 on Oct. 5 to 291 on Oct. 28 -- a drop of 56% in a matter of a little over three weeks. (The damage wasn't limited to Nasdaq Composite stocks. The less volatile Standard & Poor's 500 Index ($INX) dropped 29% in the period.)
But by Dec. 14, 1987, less than 60 days after the crash, the Nasdaq Composite had bottomed. It would take until June 7, 1989, for the Nasdaq to recover all the ground that it had lost in October 1987, but the time to buy, the bottom, had come very quickly. Just two months after the crash.
So I applied the lessons of the last "bear market" in 1987 to the "bear market" of 2000 and started to buy again in June, about three months after the March crash. On June 16, for example, I bought Atmel (ATML, news, msgs) and BroadVision (BVSN, news, msgs).
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And for a while that looked smart. By July 2000, the Nasdaq had climbed back to 4,246 -- a 34% gain from the May 23 price.
But the decline that began in March 2000 wasn't a replay of the 1987 crash. That earlier collapse had been built on speculative financial greed. A newfangled product called "portfolio insurance" would protect investors against loss in the case of a market downturn, the Wall Street financial engineers said. So it was safe to take on more risk and bid stocks higher. When push came to crash, however, portfolio insurance didn't work as advertised.
The bubble in 2000 was also built on greed, of course, but the foundation was economic rather than financial speculation. Companies inflated their sales using accounting gimmicks, and investors bid up the price of stocks to astronomical multiples of current earnings per share in the belief that future earnings growth would quickly justify those prices. When the bubble burst, not only did stock prices collapse, but real businesses failed as revenue dried up and earnings growth vanished.
Trying to understand the collapse of 2000 from my experience with the Crash of 1987 led me to absolutely the wrong conclusions. My buys on the dip, which might have worked out very well in 1987 and 1988 produced numbing losses in 2000 and 2001. My June buy of Atmel was down 51% by the time I sold in April 2002. The money in my BroadVision pick just about evaporated by the time I sold in September of 2001 with a 95% loss.
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