Newton's apple
"The apple fell from the tree and opened a world to me. The bubble burst and shook it."
Isaac Newton must have thought so when the stock bubble of the “South Sea Company” burst in the fall of 1720. It took just a few months for it to grow to its full size. In fact, the Newton later said,
“I can calculate the motion of heavenly bodies, but not the madness of people.”
It is an interesting thing with investment bubbles. We look back with incomprehension on the madness of investors. "How stupid the people were," we think head-shaking in the present. But are we really smarter than Sir Isaac Newton 300 years ago, who lost a large part of his fortune back then? After all, Newton wrote ”one of the most important works in the history of science” Intelligence, education and even genius are not a shield against stock market madness.
Source: https://de.wikipedia.org/wiki/Isaac_Newton
Today the stock market is as divided as rarely seen in history. While many sectors are under pressure, individual technology sectors are marching strongly upwards. “Cloud” shares in particular are living up to their name and rising to lofty heights. Is it a bubble? Not necessarily, cloud computing is changing our world. So did the internet companies in the technology bubble of the 1990s. In any case, the current valuations are breathtakingly high. We do not measure by profit. Rather, the yardstick is a multiple of revenue.
How many times sales is appropriate?
In 2002, Scott McNealy looked back at the 1999 Internet bubble and asked, “What were you thinking?” He was the founder and then CEO of Sun Microsystems. McNealy was alluding to the valuation of his stock at ten times its turnover. Today, “10 times sales” would be favorable for the fast-growing cloud companies. In the meantime, buyers are paying prices that correspond to 20, 30 or even 50 times the turnover of the company. We are not talking about insignificant sizes here. One example: The video conferencing company Zoom is currently trading at a market capitalization of over 100 billion US dollars. Investors pay 80 times the turnover without blinking. Admittedly, sales are growing explosively. They increased by 169 percent in the last quarter (compared to the previous year).
Zoom price development over 1 year. Past performance is not a reliable indicator of future results.
Are we now in a bubble? If the question were easy to answer, it would not arise in the first place.
Investors have to approach things differently. Hopefully, they have a well thought-out equity portfolio and a clear strategy, or more precisely, a discipline, to follow.
There is no reason to throw everything overboard. The danger therein lies precisely in selling everything to jump into the currently hot stocks. Or a newcomer to the stock market who finally wants to be part of it and invest her total savings. If the prices fall to the bottom of reality, the damage can be great.
Here, there and everywhere
It is the fear of missing something that plunges us into misfortune. Patiently waiting for an opportunity that falls within our circle of competence will be rewarded. The most experienced and successful investors say "no" to almost all investment opportunities. Because they cannot assess the opportunities and risks or do not understand the business model. An important insight in life and in the stock market is: I don't have to be there in everywhere and I can't be there in everywhere.
Three centuries ago, Newton caught a mania that cost him a lot of money. You can read all the details at the "Royal Society", whose president Newton was from 1703 until his death in 1726. Contrary to other stories, he died a rich man. His estate amounted to 30,000 pounds (comparable to 20 million pounds, euros or dollars in today’s value). It is therefore worthwhile not to give up after sustaining a large loss.
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