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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Among the most enthusiastic investors in tech stocks were those who were the most enthusiastic about technology, biotechnology, and the Internet? A new kind of financial instrument. In 1720 it was shares in publicly traded joint stock companies whose prices were widely quoted, allowing investors to measure the growth in their own wealthor how much they were missing out on by not being in. In the 1990s it was technology stocks; yes, there had been tech stocks before, but not so many, and not since technology had become a part of everyday living. They were what they claimed to be: the Next New Thing. Among the most enthusiastic investors in tech stocks were those who were the most enthusiastic about technology, biotechnology, and the Internet. ? A sense of a New Era being born. In 1720, England had a new king, and its stature in Europe after the Treaty of Utrecht promised a sustained age of peace, at a time of exciting scientific progress. In the 1990s, America as victor in the Cold War would preside over an era of global peace. The new president was no mere Cold War retread but a forward-looking Baby Boomer, who shared the enthusiasm, optimism, priorities, and fun-loving style of the Sixties Generation. The 1990s soon forgot about the Crash of 1987, which had been a brief flap that did not derail the economy, in part because the general public was not deeply involved in the stock market. The previous crash was in 1973-1974, but that was the Nixon crash, and the Boomers had, at the time, little political power and very little invested in the stock market. ? In 1720 the magic appeal was a concept of wealth creation that, though hard to explain, seemed easy to understand. Its essence was an entirely new approach, and people wanted to believe that what was new was automatically good. In the 1990s what was new was obviously good, even if you didnt understand how it worked. Many people who bought shares of, say, JDS Uniphase or Cisco would have had trouble explaining what the company actually did; even those who understood their hot products had only the vaguest idea how technology companies could make large, sustainable long-term profits in product lines in which there were few real barriers to entry. As Andy Grove, co-founder of Intel had written in Only the Paranoid Survive, every night he worried about some guy in a garage who would come up with the killer invention. Intel had survived several tech boom/bust cycles. Paranoia was almost nonexistent in the rest of Silicon Valley in this cycle: Euphoria had crowded it out. ? In 1720 there was momentum, excitement, and wealth beyond dreams of avarice. South Sea shares were going up so fast that they swept doubt before them, and everybody who was anybody was in the game. In the 1990s tech billionaires were greater heroes than rock stars or professional athletes; tech billionaires were cool. Young people labored long hours for tech start-ups, each hoping to be the next centimillionaire or even billionaire. Nor were these dreams mere fantasies: For a while, more new billionaires were being minted in months than had been created in all previous American history. Nasdaqs upward momentum blew away doubt and skepticism. ? In 1720 there was a virtual unanimity of opinion among the elites that nothing could go wrong. Although dissent was not banned by law, peer group pressure among the wealthy commercial class and the aristocracy was so powerful that almost no prominent people stood up to ask whether the emperor really had clothes. In the 1990s, when Warren Buffett, the most successful American portfolio investor in history, rejected the entire technology industry as an investment concept, he was derided as old and out-of-date; ditto for self-made billionaire Sam Zell. Only a handful of academics challenged the prevailing ethos. Endowment funds of leading universities switched major percentages of their portfolios into venture capital investing in start-up companies, and faculties were universally supportive. If one was with it, one was in it. And the bleat goes on. A little more than 280 years after Newton learned that financial gravity was as powerful a force as natural gravity, the process was repeated on a grander, global scale. It had reappeared from time to time during the intervening centuries. In the 19th century there were booms and busts tied to overbuilding of canals and railways. In each case, optimism led to intoxication, leading to a massive hangover. Rule I. Gravity always asserts itself. That its assertion produces such widespread financial ruin comes from investors refusal to follow a rule enunciated by another great scientist. . . Rule II. Einstein said that compound interest is the greatest force in the universe. Compound interest is at the root of successful wealth building, whether one invests in stocks or bonds. But it only works as a wealth-builder within reasonable numeric limits. For example, when the S&P rose more than 20 percent for five straight years, a feat never before achieved, it raised near-insuperable challenges for the next and succeeding years. Nasdaqs 88 percent leap in 1999 could not be compounded higher, and therefore the outcome was reverse compoundinga force as potent as compounding. In each of historys boom-bust cycles, the capital assets built during the boom fell to values that a new generation of entrepreneurs could use profitably, and a new cycle began. The Russian economist Nikolai Kondratieff, working in the 1920s, observed these cycles and constructed an historical pattern of long waves. He correctly forecast the Great Depression, for which Stalin praised him. But he then predicted that based on the long waves, capitalism would come back. Since Stalin had assured his followers that the Depressions onset signaled the death throes of capitalism, Kondratieff s forecast was anathema. He sent the economist to death in Siberia. Kondratieff remains, as far as I know, the only economist murdered for making an accurate forecast. It is said (by cynics) that his successors have learned from his example. That explains why the economic consensus has never predicted the coming of a recession and why economists have trouble agreeing on when it came and when it ended. Bearers of bad news used to be beheaded. Now they are just denied tenureor attentive audiences. These major crashes are economically and financially transforming events, and, as such, are structurally different from the normal bull/bear blow-offs tied to economic cycles and the normal excesses of fear and greed. Each modern replication of this collective rush into the abyss had enormous effects on the economy and on capital markets. In particular, each pointed the way to the investment strategies that would be most successful . . . not just for ensuing years, but for ensuing decades. As Churchill said, The farther backwards you can look, the farther forward you are likely to see. This book is meant to be a practical Investors Survival Guide, which means its extensive discussion of past folly is not just history for the curious to savor. It is market lore every investor can use, like the lore accumulated over centuries that sustains users of the wilderness. It will be a long time before the next Triple Waterfall hits the capital markets. It may be a long time before the next big stock market plunge. In the meantime, the investment landscape will be littered with both the carcasses and the opportunities created by Nasdaqs collapse. |
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