THE MARKET COMES FULL
CIRCLE
(April, 1999)
With 1999 well underway, Century Management is entering its 25th year in the money management business. The past twenty-five years have afforded us the opportunity not only to have read about market history and its many cycles, but to have lived and worked through them.
Since 1974 we have seen many market extremes and market manias. For example, the "Nifty Fifty" (the 50 largest stocks) declined on average 65% between 1972 and 1974, event-ually selling as low as 12 times earnings. Today's "Nifty Fifty" is trading at an average of 45 times earnings and the S&P is trading at 30 times earnings, both at historical highs.
In 1980, oil sold above $40 per barrel and 18 years later in November of 1998 hit a low of $10.82. This is a 25 year low, when adjusted for inflation.
We have seen gold, during our 25 years, hit a high of $800 per ounce in 1980, and today, 19 years later, hit a low of $274 per ounce.
Between 1972 and 1980,
while gold was moving from $100 per ounce to $800 per ounce and oil was
increasing from $10 to $40 per barrel, the stock market dropped. During
those years, stocks were the most unpopular investment. In 1980, public
participation in the stock market reached a six year low. Out of this
extreme pessimism and unpopularity, the largest bull market in our history
was born.
Today, the
stock market is the most popular place to invest and the large technology
stocks are getting most of the attention. At the same time, investing
in oil, gold, and commodities would have to rank as the most
unpopular form of investments.
A review of the extremes that took place in the oil, gold, and commodity markets shows that they grew to such heights, they became manias. Investors bid up the prices of commodities, oil and gold stocks to levels that even after 20 years the excesses are just now beginning to come into balance.
How does a mania develop? The first investors in any market are those working in the industry. Being on the ground floor they are able to see the wonderful opportunities for growth, so they invest in their company and those related to the industry. As the prices of these stocks begin to rise, they attract continued attention from "Wall Street" and the media. As more and more investors who are not in the industry begin to learn about the potential for growth, and they see no risk in sight, they too invest.
The final stage that brings us to the mania level is when the fundamental values no longer matter. In other words, sales and earnings don't count. All that matters is that the stock is going up and everybody owns it. The pressure of not owning the stock that all of your friends and co-workers own that's going no where but up becomes too great. At this time in the market place, we refer to the euphoria as a mania.
Sir John Templeton, founder of the Templeton Funds, captured this cycle with his quote, "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell."
This brings us to what we believe is today's mania - investing in a very narrow group of technology stocks and indexing in the S&P 500.