Dot-com Crash in 2021: Is It History Repeating Itself…. Maybe Not!

We are seeing a few days rotation out of tech and into other areas of the market that were down in the dumps. The Nasdaq, at the time of writing this email yesterday, is down 7% from its all-time high and 3 percent away from what would be considered a “correction”.  I always say to clients that we can’t look at the short-term day to day and week to week swings as the market will always come back to valuations or more importantly, when it comes to tech, future earnings.  However, I want to clear up a few misconceptions that can get us to look at the past and think the past will repeat itself. 

During the dot.com crash in the start of the century, people were speculating on the companies they thought would be the leaders of the internet revolution. 99% of these companies were operating at a loss without any true fundamentals, earnings, or growth.  If you were invested in Pets.com, Webvan, or a slew of other companies, you would have lost your money. If you invested in Amazon, Qulacomm, and Cisco, you would have made a nice rate of return riding that roller coaster and holding on. Even more importantly, if these internet companies were only 10% of your portfolio, you wouldn’t have had to feel as much pain on the downside which is why I always say to take some gains off the table and rebalance. 

2020 and 2021s rise in tech valuations, in my opinion, are not anywhere near where we were during the dot-com crash. Most of the companies that are driving the market up are extremely profitable and are the “blue chips” of the generation X population. They are growing into their valuations which is very different than what traditional value stock holders understand. With zero interest rates, people are willing to invest in the future as their money wouldn’t yield much in fixed income.  The earnings coming out are extremely strong and I see no semblance of back then (though, of course, there are the GameStop and SPACS of the world). When these “pull backs” happen, we tend to forget that when a stock runs up 60% and comes down 20%, some of that is just a short term sell off because the stock has jumped so high or a repricing into valuations. It doesn’t mean that the company is now a sell if you believe that in 1 to 3 years, the stock might be a lot higher due to innovations and creativity of the management of the company. Tesla is a good example of this. If Tesla is a car company, probably pretty overpriced today. If it is a battery company and tech innovation company, could it be worth a lot more in the future? Only time will tell.

My opinion is that as long as we stay diversified, don’t panic when things get shaky, and try not to let social media or our friends advise us on the next big economic event, we will hit our financial goals and have a lot less stress then over analyzing every move in the market.  Markets move, that’s what they do and always have done. The innovations of financial apps let us look at our accounts daily.  I think this creates a strong amount of anxiety. My most patient, non-anxious clients tend to look at their statements quarterly. I believe there is a strong correlation. Focus on the long term and the goals become easier to achieve.