I agree with the many market observers who think we’re approaching the peak of one of the biggest speculative financial bubbles in history.
So I’m going to write about that.
But before I do, I’m going to remind you about some things you might want to know about me.
First, I have some experience with bubbles — as a participant, observer, and student of history. Second, my bubble experience includes an event that, even now, a couple of decades later, makes me ashamed when I think about it.
In 2003, in the aftermath of the late-1990s dot-com bubble, regulators investigated the way research analysts and investment bankers had worked together on IPOs and other financings during the boom. A dozen brokerage firms and stock analysts (and I) got charged with civil securities fraud. I had to pay a huge fine and got kicked out of the securities industry.
Along with my work as an analyst, these events were widely publicized at the time, and I’ve written about them and my other bubble experiences extensively. But here’s a summary.
From 1994 to 2001, I was an investment banker and internet-stock analyst at Prudential, Oppenheimer, and Merrill Lynch. In 2000, I was ranked the number-one internet analyst by Institutional Investor, the Wall Street Journal, and others. I covered Amazon, Yahoo, AOL, and other high-fliers of the day.
Like many others, I was, in hindsight, too optimistic about the long-term prospects of many of these early internet companies — and I have felt like an idiot about that ever since. But my views were more nuanced than they were later made out to be. In the hope that my thinking will help provide context for those navigating the current bubble, I’ll share some of it here.
In a marvelous treatise called “A Short History of Financial Euphoria,” the historian John Kenneth Galbraith observes that speculators in bubbles usually fall into one of two camps. The first camp believes that the wild price appreciation is not a temporary “bubble” but a permanent change in the way certain assets are valued (e.g. “It’s different this time.”). The second camp believes that it is a bubble, but that he/she/they will be able to cash out before the crash.
In the late 1990s, I was between these two camps.
I believed the internet was a profound new technology that would cause great upheaval in the economy and create lots of amazing investment opportunities. I also believed — and warned repeatedly — that “what looks like a bubble probably is” and that many then-soaring dot-coms would fail and disappear.
Given these risks, I recommended that even aggressive investors only invest a small percentage of their portfolios in internet stocks and hold them for the long haul. I rated almost every stock I covered “High Risk.” And I put my money where my mouth was: I bought and held Amazon, AOL, Yahoo, and other tech stocks. So when the bubble burst, I, too, got obliterated.
From 2000 to 2002, the tech portion of my portfolio dropped about 90%. Many of my holdings never recovered. Thankfully, one of my stocks, Amazon, did recover — and then some. As Jeff Bezos has noted, when you get the big picture right, you can be wrong a lot and still be OK.
In his book, Galbraith observes that all bubbles end the same way — with the public evisceration of those “previously most admired for their financial imagination and acuity” (e.g., me.) I didn’t read Galbraith’s book until after the crash. But it gave me a sense of what might be coming.
Sure enough, in 2002, the then-Attorney General of New York, Eliot Spitzer, alleged that the relationship between the research and banking divisions at brokerage firms created a conflict of interest that made our research too optimistic. I had no issue with Spitzer’s desire to improve the industry. But I did believe it was possible for analysts to do their jobs with integrity. I testified that I had never written a word in a research report that I didn’t believe. Alas, Spitzer and the SEC went ahead and filed complaints about a dozen firms and analysts (and me) and restructured the industry.
When those charges hit, I became an international disgrace. I worried I might never work again. Thankfully, while trying to figure out what to do next, I found that a lot of people still believed in me. I will forever be grateful for that.
One gratifying footnote to my regulatory experience came in 2009. (And, no, I’m not referring to the prostitution scandal that forced Spitzer to resign as the Governor of New York.) The roughly $450 million in fines that I and the other firms and analysts paid went to create a fund to compensate those who believed they had been misled by our research. There were so few claims about my research that my portion of the fund mostly sat there earning interest. Eventually, the fund administrators just sent it to the Treasury.
So that’s some of my history with financial bubbles. And now on to some things I learned! …