Bubbles are a normal part of life. They represent the extremes of greed, ego and self-righteousness. Let's talk about a recent time of a bubblicious market where I barely made it out alive.
One of the most spectacular times in my trading career was during the 'dotcom' 1990's. It was in the latter half of that decade when I really focused in on trading in tech names. The surges each day/week were so large that my account ballooned to levels I never thought were imaginable.
It was a fun time for sure if you were bullish. I was managing pension money for Sunkist Growers back then, and had a small 7,000 Schwab account to 'play with'. I never thought too seriously about making big money, but I soon discovered 'margin', and that was a miracle to pyramiding my trades on top of one another.
Margin is borrowing from the broker against your collateral (stock). I didn't know it at the time, but you can get into a lot of trouble with a margin account (and using it). Some use it smartly and advantageously, but I did not. During that time, there was little to fear of the market coming down, so 'margin to the hilt'.
Oh, there were the few 'brushes' with disaster, like the Russian ruble crisis, Asian contagion, and the mess at Long Term Capital ('97 and '98). But these fires were put out fast, and why not? Tech stocks were rocketing, who had time to fight a crisis. Fix it and just keep moving forward.
I played all the stocks under the sun. You name it, I owned it: Yahoo, CNET, Doubleclick, CMGI, Infospace, Go2Net, Juniper Networks (JNPR) , Redback, Arriba, Brocade and especially those Y2K stocks that had a 'fix' for your computer systems (Accelerate Tech was one). There was a time in 1999 when traders would just flock to the one name that was hot for a week. Huge gains were to be had.
All the while, those not participating or shorting the names that were flowing said the market bubble was getting bigger and needed to be pricked. Even Amazon (AMZN) was on the hit list by the shorts but continued to defy the naysayers. But the gains continued to compound and I enjoyed it so much as did my risky trading brothers.
Until, the Fed said 'enough'. Valuations in 2000 reached more than 26x earnings - extreme overvalued. This was three years after Alan Greenspan's 'irrational exuberance' speech. The bubble exploded higher from that speech in Dec 1996. A series of rate hikes was enough to choke off the excess risk and cause the markets to fall hard in early 2000, and some companies are no longer around today to see what happened on the other side.
As for me, you guessed it. I had a major blowup after growing my account past $500K. I took far too much risk (full margined) with no protection working. By July 2000, I was left with under $100K (I did take some out for my house). I was fully on margin, had no puts (because the markets would rise forever, right?) and little cash to buy the dips. The theme of bubbles goes back centuries, and usually the majority get hurt in this game of musical chairs when the music stops.
I learned valuable lessons from my painful outcome: discipline, control, risk management among others. Bubbles are not bad, ironically they create a great deal of value for investors and companies. Whether it's rational or not is another discussion.
So, are we in a bubble now like many are saying? If not, then why? Find out what I think in next week's blog.
(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.)
