In passing comments I made to some in my trading circle I noted that although I wasn't around in 2000 when the IT Bubble burst, there was a rather confident mood this time around with the index comfortably securing its spot at previous highs effectively breaking a negative return had you invested just before the bubble popped.
If one thinks back to the Great Crash in 1929 you will recall the number of years it took to return to former levels and it's for this reason that I believe the Dot-com bubble will sketch the Nasdaq in trading and investing history as a reference point for future bubbles. The inclusion of it in the list of widely documented financial crashes of severe proportions does serve as a warning of the consequences of complacency and the damaging potential of human's greedy ways.
Dot-com bubble 2000
A brief history of the Dot-com bubble can be simply explained as this; new sector of an economy coupled with technological innovation and growth rates to lucrative to pass by. The late 90's were defined as an era where the introduction of the internet as a form of communication and mass information transfer were the name of the game. Much hype had been built up around these fledgling internet companies, although the earnings uncertainty were merely brushed aside in favour of earnings potential.
The problem with this approach is that there is a substitute of authentic earnings for an increased awareness of aesthetic chart value to feed an obsession of seeing charts breaking numerous records. Participants were pushing the price of internet companies at phenomenal rates, ignoring the usual metrics which should have been used and thus created a sensation.
Did anyone make money out of the Dot-com rally?
Of course they did, especially the ones who were aware of what was going on. These type of occurrences happen frequently with the concept of financial market bubbles being studied more closely so as to have a greater understanding about what causes them and the after party hangover which hangs around...for years.
It becomes a question of the style of which you either trade or invest. Usually with bubbles there are huge amounts of money flowing into one particular stock or sector. The valuations start exhibiting overpriced indicators for long periods of time with no loss of momentum. Investors begin to take on an active approach rather than passive to protect the exponential amount of money that's made in a short span of time.
In the battle between technicals and fundamentals, technicals always come off best in these markets. The reason being is that there is no consideration to a fair value and where those in the fundamental camp might begin to offload at higher levels, the technical crowd will keep propping up the price level and helping it cross over higher and higher levels making the price look vertical in nature. As the price starts to take on this shape more fundamentalists question the validity of the valuation...again and then we see the whole process start again.
This is exactly how it happened in the Dot-com era where internet companies had not become profitable as of yet but there was still untapped opportunities. In hindsight looking at the tech companies that dominate the stock market today, they would prove profitable in the long run however at the time they were running at huge losses. We still see this today with social media companies being the new flavour of the day.
Crouching Tiger, Hidden Dragon: The Chinese Internet Boom
Fast forward 15 years later and a similar pattern has been emerging for a number of years within the Chinese internet sector. Most notably we have see China's biggest, Alibaba, make it's US listing last year dominating the news headlines as the largest IPO in history.
In the local arena, Naspers has seen it's investment made a few years ago in Tencent flourish. However this hasn't been without scrutiny at the sizable movements it's made in a short span of time. The P/E ratio is well over 100; with it being at these levels fundamentalists are once again hot on the heels. Can it continue?
The fact of the matter is it can't and I think it's imperative to understand that. There will come a time when both companies , Naspers and Tencent , will have to prove that there earning prospects reach the bottom line and it's because of this we will see either consolidation which I feel is highly unlikely given the vertical nature of the chart or a pullback. The depth of the pullback will be determined by the quality of the decisions made by both past and present management as well as how well these prospects are executed to profitability.
It's important to note that I am not in any way calling a market top, for all we know Naspers might even go on to see R3000. However what I am doing is painting a possible scenario to events which may play out in the future. The key here is that we have no control of the market but we do have a degree of understanding to how it may pan out. The market, so much like history, has a way of repeating itself and it would be critical for us to know what might happen.
If there's one lesson we can take out the Dot-com bubble is that investors feel more comfortable with seeing the physical instead of intangible promises going to the moon and back. If you're the type of investor that prefers the slow and steady pathway this kind of stock certainly won't fall within your risk profile. When it comes to long term investing in these stocks the results often end up in disappointment which is why you need to have an active approach at all times.
Finally, there is money to be made but always remember risk management before profits always.
Stay Safe Stay Profitable
If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR
In the battle between technicals and fundamentals, technicals always come off best in these markets. The reason being is that there is no consideration to a fair value and where those in the fundamental camp might begin to offload at higher levels, the technical crowd will keep propping up the price level and helping it cross over higher and higher levels making the price look vertical in nature. As the price starts to take on this shape more fundamentalists question the validity of the valuation...again and then we see the whole process start again.
This is exactly how it happened in the Dot-com era where internet companies had not become profitable as of yet but there was still untapped opportunities. In hindsight looking at the tech companies that dominate the stock market today, they would prove profitable in the long run however at the time they were running at huge losses. We still see this today with social media companies being the new flavour of the day.
Crouching Tiger, Hidden Dragon: The Chinese Internet Boom
Fast forward 15 years later and a similar pattern has been emerging for a number of years within the Chinese internet sector. Most notably we have see China's biggest, Alibaba, make it's US listing last year dominating the news headlines as the largest IPO in history.
In the local arena, Naspers has seen it's investment made a few years ago in Tencent flourish. However this hasn't been without scrutiny at the sizable movements it's made in a short span of time. The P/E ratio is well over 100; with it being at these levels fundamentalists are once again hot on the heels. Can it continue?
The fact of the matter is it can't and I think it's imperative to understand that. There will come a time when both companies , Naspers and Tencent , will have to prove that there earning prospects reach the bottom line and it's because of this we will see either consolidation which I feel is highly unlikely given the vertical nature of the chart or a pullback. The depth of the pullback will be determined by the quality of the decisions made by both past and present management as well as how well these prospects are executed to profitability.
It's important to note that I am not in any way calling a market top, for all we know Naspers might even go on to see R3000. However what I am doing is painting a possible scenario to events which may play out in the future. The key here is that we have no control of the market but we do have a degree of understanding to how it may pan out. The market, so much like history, has a way of repeating itself and it would be critical for us to know what might happen.
If there's one lesson we can take out the Dot-com bubble is that investors feel more comfortable with seeing the physical instead of intangible promises going to the moon and back. If you're the type of investor that prefers the slow and steady pathway this kind of stock certainly won't fall within your risk profile. When it comes to long term investing in these stocks the results often end up in disappointment which is why you need to have an active approach at all times.
Finally, there is money to be made but always remember risk management before profits always.
Stay Safe Stay Profitable
If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR
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