https://www.wsj.com/articles/how-to-read-the-myopic-market-11583685581
Happy 20th anniversary Tuesday to the Nasdaq index peak of 5049 back in 2000, zenith of the dot-com era. After observing our current beer-head frothy market for months, I was an idiot for thinking I could hold off until today to write a warning column. The market always trades to maximize pain. So, ouch.
Time waits for no one. One thing I’ve learned investing is that for every stock there’s this invisible arrow pointing to some moment, some time in the future, that markets focus on to evaluate it. That time horizon isn’t published anywhere; it’s something you feel, an equity duration. Typically, it’s 12 to 18 months.
Euphoria drives that arrow out years. Beyond Meat was selling at 20 times 2020 revenue, Apple stock boomed even with flat-ish iPhone sales, and Tesla stock did Icarus-like figure eights close to the sun. But Nasdaq and the entire market have done so many daily ascents and drops and barrel rolls since their peak Feb. 19—it’s now a coronavirus roller-coaster market. Why? Because uncertainty can collapse time horizons to months or even tomorrow.
Remember, a stock’s value is the sum of all future profits discounted back to today. It’s dependent on profits, growth and risk. Investors estimate future profits and growth rates, but risk? Again, you can’t look that up anywhere—it’s just a feeling based on interest rates, competition, world events and more. Beyond Meat seemed to be priced for five years out. Risk is in the eye of the beholder. So investors use a shorthand: A price-to-earnings multiple that provides some hint to how far out the market is looking. In May 1999, Yahoo’s P/E multiple hit 1,062!
Twenty years ago, we had this new internet thing, a loose Federal Reserve, AOL juicing startups in exchange for IPO shares, and momentum investors, or momos. Like ants to a lollipop, momos crawled into dot-com stocks, pouring in price-insensitive money that attracted even more momos. George Soros’s hedge fund might have been the last one in. After the Federal Reserve flooded the world with dollars to mitigate the nonexistent Y2K threat, it pulled back in early 2000 and markets reversed. Momos became nonos. After 9/11, when time horizons collapsed from years to months, Amazon’s stock had fallen 94%, to $6.
Today’s market madness features fewer IPOs, but the loose Fed and momos are present and accounted for.
