“…like it’s 1999” – Prince, September 24, 1982
With 2018 in the books, we reflect on a period of extended outperformance by large growth stocks. History and academic research tell us that this trend is not sustainable, yet it has continued for another year. Below is a diagram from Morningstar Research with the familiar nine box charts showing performance of each category over one, three and five years. As you can quickly spot in the 1 Year chart on the left, large company growth was the only category with a positive return (green) in 2018 at 2.94%. Further, small company value, at -16.61% turned in the worst performance. Long term returns (20, 30, 50 or 100 years) would show a box chart almost the exact inverse of these.
We Have Been Here Before
The late 1990s (the dot.com era) was another span where growth dominated for an extended period. At the peak, investors were still gobbling up shares of the tech companies even though they were overvalued by any standard. In the end, the highly leveraged companies (i.e. Worldcom, Adelphia, AOL and Yahoo!) and ones with marginal business strategies (Pets.com, Webvan and Gadzoox) failed or became marginalized after the technology bust. The stock prices of behemoths such as Cisco, Intel and GE have still failed to reach new highs after eighteen years. Even software giants like Oracle and Microsoft would not reach new highs until late 2014 and 2016 respectively.
…and Before That
In the late sixties through early seventies, investors drove up the stock prices of another narrow group of growth stocks called the Nifty Fifty. Again, the common refrain from stock brokers was “strong buy” with analysis pointing towards continued growth to support the excessive valuations. Many survived and continued to thrive although they failed reach new highs for many years, such as Disney (14 years), Coca-Cola (13 years), 3M (13 years) and McDonalds (10 years). Others, such as Eastman Kodak, Xerox, S.S. Kresge (later known as Kmart) and Sears lost their competitive advantages and never reached new highs. And still others vanished or were merged away at a fraction of their peak value, such as Emery Air, Simplicity Patterns, Schlitz and Louisiana Land.
Good Companies Versus Good Investments
While many of the surviving companies of these bubbles have dominant franchises with strong cash flow, they did not justify the valuations that investors placed on them. Further, the invincibility with which we view Amazon today, is similar to how investors perceived Walmart in the 90s, Sears in the 70s and Woolworth before that. What can happen? Competition can change comparative advantages quickly; think Blackberry, Nokia, Palm or Motorola. Sometimes the government takes anti-trust action against monopolistic practices like they did to Microsoft. In the end, these forces tend to be clear in hindsight but difficult to foresee.
We thank you very much for the trust you have placed in our firm. Please do not hesitate to contact us with any questions. Further, if your financial circumstances have changed, please call the office to set up an appointment to review your plan.
Best regards,
Shoreline Financial Advisors, LLC
