It’s Starting to Smell like 1998
Posted on: April 2, 2018
The past few months have made me feel like an old man, when generally, despite the grey hair, I don’t feel like one. I’ve been caught up in this sense of deja vu, and it all started back in February. Every day my phone was ringing. Clients were calling about speculative investments. Bitcoin. Cannabis. Bitcoin. Bitcoin. And more bitcoin. And then, without warning, the calls stopped. And in the silence (there really wasn’t that much of it), I had some time to think. Speculate. Reminisce if you will. And finally, I put my finger on it.
I’ve felt this way before. We all have.
February, and the months leading up to it, was full of pressure. The pressure that we were missing out on something, something big, something…life changing. It felt so familiar, and when it came to me, it came in an instant. It’s the tech scramble of 1998-2000 all over again. Do you remember it? Do you remember how any company that put Network, Chip, or Software into its business plan was destined to be a huge hit on the market? How multi-millionaires were being minted on a daily basis? Do you also remember how it came to an end in March of 2000 and how it took almost a decade for the US market to work its way out of the excess that had built up? It might be worth holding that in your mind. I’m not saying today’s conditions are the same, but they feel awfully similar to me.
It’s been a few months since I had my revelation, and all I can say is, “Oh my, oh my, it’s looking more and more like the late 90s…” and I’m not referring to the return of snapbacks and tearaway pants. It really is truly amazing what history can teach us, and coupled with experience in a career, it’s downright prophetic. Like I said before, I’m a grey-bearded, grey-headed (where I still have hair) whatever you want to call it. I’ve had a long career and earned each grey hair. When I reflect back on the beginning of my career, I remember this clearly: business leaders were touting the latest and greatest tech, names like Cisco, Microsoft, 360 Networks (Oops…), Cache (what?), and Optical Networking. Just add a dot com, and bam! You have a newly minted millionaire from an IPO. Flash forward. The names have changed, but the behaviour is back! Did it ever go away? Nope! It was just doing the same thing somewhere else, and now, it’s back in a familiar place.
But what’s different and eye-catching? The difference we’re seeing between boring old telecom and utilities companies and the “giddy up” new economy business. For the longest time, there wasn’t a lot of interest in these “old” and “boring” businesses—let’s be honest, that is still primarily the case. That being said, I do sense a shift coming. The latest darlings—Facebook, Amazon, Netflix, Google—are facing some additional challenges. Just check the paper. You’ll see headlines and government action articles that say, “Tech Backlash Drives Monday Selloff” and “Washington Weighs in on Tech.” I could spend time listing how many headlines that make my point, but you get the point? Right? Right.
To be clear, I have no doubt that these companies will continue to be innovators, but their share prices might not have the same momentum as we’ve previously seen. “Sentiment” appears to be weighing on them—maybe it’s the law of large numbers, maybe it’s a US President who is less orthodox than what we expected, maybe it’s the crippling weight of their own success. Regardless, there is a change occurring, and it’s opening up a space for the “old economy” businesses to come in again. These companies continue to move forward steadily, and with the recent selloff, they are paying even higher dividend yields. Now, I realize this requires share prices to decline in the short-term, but what can I say? I never said we could eliminate volatility, but we can smooth out the ride and ensure the quality is high.
Dividends are good. Higher dividends are better. In the fourth quarter of 2017, we repositioned the portfolio to hold more of the “old economy” defensive businesses. Not bitcoin. Not cannabis. In the first quarter of 2018, we took profits (sold at high prices), added to our US cash, protected the portfolio from the likely scenario of governments increasing short-term interest rates and found a high dividend paying company to add to our model portfolio. We zigged when most people zagged. And in January and February, it didn’t look like this was the right direction to go. Then, in March, things started to make more sense. This is what we do, and the real-time monitoring and rebalancing we employ is fundamental to our portfolio management process. And in today’s market, it’s my belief that it will reap benefits.
No other approach makes sense to me.