The late 1990s was a time of great optimism and hope in the United States. The stock market was booming, and the future seemed bright with prospects of a new era: one with lower trading commissions, a new technology called "the internet", and the US running budget surpluses as far as the eye could see.
Robert Shiller decided that he wanted to methodically dismantle the prevailing wisdom of the time. Shiller believed that stocks were overvalued, and that wealth destruction "equal to the value of the housing stock in the United States" was upon us.
Shiller's two key points were: 1) that periods of optimism coincided with high stock multiples, and those high multiples predicted lower future returns; and 2) that promises of new technology such as the internet tended to disappoint investors, as similar technologies had not led to fundamental re-calibrations of the economy or changes in the country's underlying growth rate.
The book became a New York Times bestseller. I worked on Wall Street in those days, and Shiller was the talk of the Street. Love him or hate him, everyone had an opinion on whether he was right or wrong.
In the years that followed, the stock market crashed, and, through 2008 it appeared as though Professor Shiller had nailed it. But as we enter 2022, we see that the story played out a little differently. It's time to take another look at Irrational Exuberance: what Shiller got right, but more importantly, what he got wrong.
In the year 2000, people were excited about the internet but it hadn't really changed how we lived. By 2008, the internet was becoming exciting - but the largest companies in the S&P were stalwarts like Exxon Mobil and General Electric. While companies such as Microsoft and Google were visible, they were both at market caps of under $250B.
Fast forward to 2022 and the S&P looks a little different. The largest companies in the S&P 500 are Apple, Alphabet/Google, Amazon, Tesla, Microsoft, and Nvidia. If you can't see the trend yet, here it is: every one of these companies, even Tesla, has ridden the internet wave to valuations over $500B.
What can we learn?
Conclusion #1: radical changes in technology act like a freight train gaining speed downhill. Slow at first, but ultimately an inexorable and massive force. As optimistic as we all were about the internet in the year 2000, it took over 20 years for the economy to fully recalibrate to this new technology. I suspect blockchain, today's most interesting new technology, will also take many years before it too generates riches beyond the dreams of avarice.
Conclusion #2: the value of these new technologies tends not to be captured by existing companies. They require new companies that figure out how to generate value in a radically changing world. Again, regarding blockchain, while we don't know whether the winners in this era will be Coinbase or a company we haven't yet heard of, we should invest in the companies that are growing in this space.
Conclusion #3: we should anticipate some major crashes along the way, and use those opportunities to buy the companies with huge growth prospects. Although they've minted many millionaires, don't forget that between the late 1990s and today, the stock prices of Amazon, Apple, and Nvidia have each had crashes of 80% or more. It took an iron will to buy those dips. But when truly revolutionary businesses go on sale, it's probably time to be a buyer. Keep your cash ready for the next blip, and good luck!