Don’t Forget History

Fooled & Fueled

All too often we remember what we need to forget and forget what we need to remember. History has proven investors have short-term memories. Hot sectors pop up and investors are fooled and fueled into making poor investment decisions that lead to disaster. The “fool” part is the belief that somehow this time is different, and the “fuel” is the hype. We seek what we don’t have and abandon what we’ve been given once we have it.

Investors are often told this time is different and that the fundamentals don’t matter. The thought process is often something like, “Don’t pay attention to whether the company or the sector earns money–someday it will.” So, investors who have saved and invested for years in traditional quality companies migrate to this new world of change. Every decade, we face one to three new sectors that seem to be fueled by hype and even show early results and promise–only to look back later at carnage or wrecked finances.

So, how do we balance our reason? First, if a company or sector doesn’t make money or have earnings, be careful. Many historical examples exist–and even recent ones–where a stock or sector soared due to hype, fueling investors to abandon traditional sectors, only to find the promise of new returns ended in disaster. Consider this: returns are a historical event for those who owned the stock before the rally.

For example, one chip maker has become dominant in the AI space. Many investors want to own the stock now that it has gone up. But the key is to own it when no one is talking about it. If they are talking about it, it’s often too late. When you spread risk between sectors, as we do within the Indexperts indexes, and place a focus on companies with earnings quality, you are buying companies that, in several years, others will be talking about. Chasing often means the event is behind you.

No better example exists than the NASDAQ during the dot-com bubble. In the late 1990s, technology stocks–especially internet-based companies–became the market’s darlings. The NASDAQ Composite more than doubled from 1998 to early 2000, fueled by a wave of IPOs, media hype, and the promise of a “new economy.” Many of these companies had no profits, no proven business model, and, in some cases, no revenue at all. Investors convinced themselves that “this time is different” and that traditional metrics like earnings no longer applied.

At the peak in March 2000, valuations reached levels that defied historical precedent. Then reality set in. As it became clear that many companies could not deliver on their lofty promises, the NASDAQ fell nearly 78% over the next two and a half years. Portfolios that had chased performance and abandoned diversification were decimated–often taking more than a decade to recover, if they recovered at all.

Internet Stocks that Failed

The lesson is simple: by the time a sector dominates headlines and appears to be a one-way bet, most of the gains have already been captured by those who invested earlier. What follows is often not sustained prosperity but a painful reversion to reality.

Like the NASDAQ, there will be many so-called “new ways” to get rich quick. But be careful about abandoning a quality, well-balanced portfolio with real earnings in favor of one built on hype and promise with no earnings. At the end of the day–earnings matter!