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September 19th, 2021

Does anyone remember the dot.com bust?

Does anyone remember; Webvan, Boo.com, or Worldcom?

Do you remember the wild Initial Public Offerings (IPO) of the dot-com companies – companies which by going public raised millions of dollars but never showed a profit?

Do you remember folks quitting their jobs to day-trade in “the market”?

Does anyone remember the media hype associated with financial markets during that era?

And, does anyone remember how it ended?

In a 1996 speech, Alan Greenspan, the then chair of the Open Market Committee of the Federal Reserve Board, referred to the dot-com phenomenon as “Irrational Exuberance.” Speculation is the act of making a relatively risky investment in the hope of making a sizeable short-term profit from price fluctuations; house-flipping, day-trading, cyber currencies, anyone?

Investing, on the other hand, requires a commitment to an outcome. It may be owning and developing an enterprise. It may be buying the public stock of a business that increases its dividends regularly. It often requires patience and a long-term outlook – letting the company employees work for the owner (investor) every day to provide value to customers. The likely outcome being a consistent dividend stream resulting in increased wealth.

Andy Kessler writes a column for the Wall Street Journal called “Inside View” I’m an avid reader. The following are from his most recent article, “The Stock Market Fails a Breathalyzer”:

“Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq….

 …. How about those meme stocks still getting hyped on Reddit’s WallStreetBets? Those who bid GameStop shares into the stratosphere waved at Virgin Galactic Holdings as they soared by. A year ago, the stock was $6 and it is now $190—some dupes paid $483, game over. Short sellers Melvin Capital, Point 72 and D1 Capital focused on fundamentals and got their assets handed to them. Shorts lost more than $9 billion between January and June.”

Should we disparage irrational exuberance? We could, but then we wouldn’t have the dominant tech players of today: think phone, operating system, search engine and your favorite web-based shopping platform.

The beginning of the dot-com debacle came about when the Federal Reserve bank began to increase interest rates – 9/11 followed, the rest is history. Increased rates discount future earnings and so began the path back to a fundamental investment rationale. Today we find ourselves in an eerily similar investment environment.

Today Federal Funds Rate is .25%, effectively zero. As of this writing, the ten-year maturity treasury bond is yielding 1.28%: there is little or no discount mechanism to future earnings, so stocks look fairly valued based on earnings expectations, in our view. However, it is more likely than not, that interest rates will begin to creep up. The Federal Reserve has announced they will begin to tighten the money supply. As money supply tightens, in our opinion, stocks that have climbed based on speculation are likely to retreat. As the speculative trend dissipates it may begin a corrective phase to all equities.

We like companies that provide extarordinary value to their customers. As these are the companies we chose to own, we believe the gyrations of the speculators may serve us opportunities to own more of them.


Carlos Dominguez – CERTIFIED FINANCIAL PLANNER™, Portfolio Manager, RJFS



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