Personal Wealth Management / Market Analysis
From Tower of Greed to Wall of Worry
A child-simple tale for understanding the two stalwarts of investor sentiment.
The scene: A barbershop in downtown San Francisco. It's October 1999, and stocks are reaching new highs, led by technology. Investors are wildly optimistic. In a few short months, the market will enter into its longest sustained downturn since the Great Depression. The barber has nearly finished cutting my hair and is telling me about his investment portfolio.
BARBER: …and I'm telling you, I've already made more than 100% on each of these stocks. I'm just frustrated I didn't own bigger positions all along. This week I'm going to put my entire portfolio into them. My broker tells me three stocks aren't enough to "diversify," but who needs diversification in this market?
ME: Well, technology stocks in general have done great this year, but do you think those companies can continue to do so well? Three stocks total seems a little risky for your entire portfolio.
BARBER: Hey, I already missed a lot of upside by not owning more earlier this year. Plus, this internet stuff is continuing to boom, which means these stocks are gonna keep ripping.
ME: Maybe. What exactly do these companies do again?
BARBER: I'm not sure. One of them works with IP authentication something or other, and another one has this special do-hickey that speeds up network traffic. I can't even remember what the last one does, but I don't think I could explain it even if I did.
ME: I guess I don't get it. Product technology aside, most of these internet companies are years or decades from projected profitability, yet people are willing to pay astronomical prices for their shares.
BARBER: You don't have to get it! That's the beauty of this whole thing. Just look how these stocks have done—they go up every single week. And as more people keep using the internet, the stocks will keep going up. What more do you need to know?
ME: It just seems strange to abandon a diversified investment strategy to focus your entire portfolio on a speculative—and unprofitable—segment of the market you don't understand very well.
BARBER: You're thinking about this too hard. Haven't you heard the analysts on CNBC? This is the NEW ECONOMY! If you want to cash in, get on board with these new technologies. Take my advice—you'll thank me.
ME: …
BARBER: OK, now for the haircut, that will be $10, young man. Wow, I wish I still had a thick head of hair like yours!
ME: Thanks!
ME: I guess I don't get it. Subprime only accounts for about 10% of all mortgages, and only a handful of those are in default. And look at last week's earnings reports from the major investment banks, who were some of the largest holders of this exposure. Seven of eight actually reported a net profit for the third quarter, even after taking the losses on their mortgage holdings. Doesn't sound like a crisis to me.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
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