The Rise and Fall of a Dynasty, err, I Mean the Stock Market
Have you ever noticed how analogous NFL Championship teams are to bull markets? Let’s examine the Dallas Cowboys and the last bull market to see what similarities we can find.
As the Dallas Cowboys began their impressive run of winning seasons in the early 1990’s, they relied on some strong individual efforts, like most NFL teams, but one of their strengths was their depth. They had talent at many positions with no single player accounting for the team’s success. It was the quintessential team effort that produced consistent results week after week.
While the Cowboys were busy ascending to prominence, so, too, was the bull market. Born from recession in the early 1990’s, this bull market was indeed special. Like the Cowboys, and the entire U.S. economy, the market had depth. Most industry sectors were experiencing growth and profitability, and the Internet was exploding on the scene like Emmitt Smith. Year after glorious year the market was producing phenomenal returns for investors.
Let’s face it. Investors were spoiled. By 1999, everyone expected 20% returns. It was our God-given right. Right? Likewise, by the mid 1990’s the Dallas Cowboy fans were spoiled - not as spoiled as the players, but spoiled. The Cowboys were knocking out Super Bowl trophies like there was no end. Then, just when the fans thought the party would last forever, something began to change. One by one vital member of the team left the Cowboys in search of greater fame and fortune elsewhere.
Strange, isn’t it, how curiously familiar that sounds. Late in 1999, we find the same pattern in the bull market. Something began to change in the minds of investors late in the cycle. Investors shifted away from the stable, blue chip stocks that added critical depth and consistency of performance. In short, investors jettisoned the boring old economy companies that provided vital diversification. These were the defensive linemen of holdings. As investors sold off the steady, non-marquee holdings, they poured more and more money into a small number of high-flying technology issues.
Sounds familiar. This behavior is consistent with the once invincible Cowboys. The team owner began to sell off lesser-known players, the dogfaces of the NFL, and he poured millions into his top handful of players.
The analogy is striking. The Cowboys and the bull market concentrated an increasing amount of money, and dependence, on a small group of elite performers. The result? In a word: disaster!
Both the Cowboys and the U.S. equity markets went from best to worst seemingly overnight. So, whom do we blame? Should the Cowboy fans blame Troy Aikman for a bad season? Emmitt Smith, perhaps? Hardly. The entire success of the team should not rest on the shoulders of a single player. Fault should be placed squarely at the feet of the owner. Should investors blame Cisco for tanking their portfolios? Lucent, perhaps? Hardly. The entire success of one’s portfolio should not rest on the back of only a few holdings. If your portfolio has declined more than 25% during the recent sell off, look no further than your own mirror for the culprit. It is your own greed that got you.
Now that we know whom to blame, how do we fix it? First, do not panic. Rebuilding a portfolio is a process, not an event, much like rebuilding and NFL team. It takes patience and careful planning. The starting point is to review why you started to invest in the first place. Was it to get rich quickly, or was it to build wealth over your investing lifetime? The next step is to correct what lead to the problem in the beginning. Diversify! Don’t stay in an unbalanced position. The definition of crazy is doing the same thing over and over again while expecting a different result. Diversify now! Next, seek professional advice. Making money in stocks during the nineties was like falling off of a log. Investors will not be so lucky during the next ten years. If you want to save money, learn how to sew your own clothes. Don’t try to manage your own investment portfolio. The consequence of your sleeve falling off is a few chuckles from on-lookers. The consequence of failure in investing is, well, very serious. Lastly, don’t be a fair-weather fan. Like NFL teams, markets cycle - you can’t time the top or the bottom.