Latest / Money Grows on Trees / #334 - The Last Time the Stock Market Did This, It Took 14 Years to Recover

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#334 - The Last Time the Stock Market Did This, It Took 14 Years to Recover · Money Grows on Trees

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  The stock market's doing something right now that it hasn't done since
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  the year 2000. Most people think it's just another bull run, that
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  tech stocks will keep climbing and the market will just go up. But
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  the reality is the last time we saw valuations similar to this, the
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  market crashed 70% and took 15 years
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  just to break even. So I'm Lloyd J. Ross, seven figure investor entrepreneur,
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  and I've helped thousands of everyday Aussies, Americans, New Zealanders, Canadians
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  to get out of real debt and build real wealth. In this video, I'm going to show
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  you exactly what happened in the year 2000, why history is rhyming right
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  now, and how to protect your portfolio before it is too late. So
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  let's go back to what I'm talking about, which is what actually happened in the year 2000. And
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  it was all about the NASDAQ run-up, which is actually the non-financial companies.
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  So it's actually the top 100 non-financial companies
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  domiciled in North America are on the NASDAQ exchange,
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  okay? So it tracks the performance of those top
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  100 non-financial companies. Now, incidentally, they don't have to be even domiciled in
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  America because there's a couple of Chinese companies in there too. So, what
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  happened was that from 19... This is crazy.
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  From 1995 to its peak in 2000, just five years, the Nasdaq grew 572%. Obscene, obscene growth. Like,
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  what? So, the index itself rose 86% just in 1999. Just in one year. It's
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  wild right and at its peak the Nasdaq Forward
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  PE was about 60. So it was the the Nasdaq the
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  entire market there that the top 100 It was selling for
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  60 times annual earnings now. It's up there now. I think the the Nasdaq
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  currently and presently In fact, I'll be able to tell you in real time. I'm pretty sure it's 40 right
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  now Yeah, I'll tell you in a second though The
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  Nasdaq is now at Bum bum bum
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  Okay, is that 35 roughly times earnings? Okay, so
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  certainly a ways off the 60 That's if earnings continue
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  to do what they're doing and if oil doesn't get in the way, right if
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  that happens when we're gonna strife So what that means is
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  that investors were paying $60 for every dollar of expected earnings back then.
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  Okay now in a healthy Well, you
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  know, fairly priced market, good, well-priced market,
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  15 to 20 times it would be considered good, yeah? And
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  now we're way above that again, we're at 35 times
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  earnings, not quite 60, but 35 times earnings, and we are out of a multi-year
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  bull market, and the AI Revolution
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  is on foot. Okay, but check this out back
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  then at 60 times earnings with the Nasdaq was selling out only
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  14% of firms that were going to
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  through an initial public offering to join the exchange Only
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  six only 14% of them were profitable. The rest was burning
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  cash. Okay with the promise of future world
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  domination and It's fairly similar to
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  what's happening in the AI race. They're still profitable, but they're
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  burning a ton of money. It's
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  disappearing, right? So going back
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  to what happened then, so that was the year 2000. By October 2022, sorry, 2002, the Nasdaq had
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  fallen, check this out, 78%. 78%. Just
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  two years later, right? So wiped out $5 trillion in
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  market cap. But it was an instant, not like it just crashed one day.
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  Okay, we've got to reset. It took two and a half years of
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  grinding down lower and lower and lower. So
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  it's psychologically brutal. It's more brutal than a sudden drop, say with COVID, right?
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  Because you knew that was recoverable. That was an easy one to manage. But
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  over a 50% like .com crash,
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  right? So it just obliterated most
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  of the tech companies and so it really decimated it.
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  What's interesting about that is that it took 15 years, 14 to
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  15 years to reclaim the same hire. So it wasn't until April 2015 It
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  actually hit that right? In fact the S&P 500 recovered a
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  lot faster, but you know, it took 12 years. Okay so
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  if you bought the net, but here's the thing if you bought the Nasdaq at its peak
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  and Held it you waited basically 15 years to break even
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  not make money to break even that's not a bad year That's a
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  bad decade and a half, right? So if you had invested say
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  you're super at the peak of the dozen that you at you
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  at say 50, you're
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  basically at zero when you hit 65. And that's what happens to
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  a lot of people, right? So what happened? It's a cautionary tale
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  that is important for you to understand so you can see it going forward. It's
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  the Cisco story, right? And it's been quoted
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  as to what's happening a little bit in the property market here, the Cisco story. So
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  Cisco, as a company, wasn't a fraud. It wasn't even a
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  scam. It was the real deal, a company that literally built the internet's infrastructure,
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  routers, switches. It was basically the backbone of the internet. And
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  if you could, we're going to pick one stock to own at
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  that time, Cisco was that choice, right? It's a little bit like Google now. But
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  it rose from, check this out, $0.08 on a split-adjusted basis
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  when they split shares. Anyway, so when
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  I paid $19.90 for that, it hit a high 10 years later for $80. A 100,000% return. Okay, mental.
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  And at its peak, it was the most valuable company in the world, valued at about $570 billion.
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  And everyone anticipated it would become the first trillion dollar company. So
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  its price earnings multiple at its peak was 200 times earnings. Now,
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  to put that in perspective, another company that is like that, priced
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  the same way, is Tesla. Tesla is about 200 times earnings.
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  Meaning, you pay $201 for every $1 profit. So
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  that's what was happening with Cisco's share price and it collapsed then
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  88%. It went from $79 down to $9.50. The
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  revenue didn't change. The revenue didn't change. The
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  price did because it was way overpriced. The business didn't collapse, the valuation
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  did. Cisco is one of the few that
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  survived the dot-com bubble bursting, right?
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  But it didn't gain highs again for 25 years, even
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  though revenue grew fourfold, right? It was still underwater after
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  profits grew by five X. So the
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  internet did change everything, and investors who bought at 80 were also right
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  about the technology, right? They were right about the technology. That's
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  why I don't dispute the Tesla technology. I don't
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  dispute it. I'm all for it. I'm all for Tesla, the cars. I'm all for
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  Optimus. I'm all for the technology. But you
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  can be right about technology and wrong about price. There's
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  a difference, OK? And so those who were right about the technology but wrong about the
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  price, it took them 25 years to figure that out. And
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  that's the difference between investing and speculating. So
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  whilst this trend is there again, it's a little
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  bit different. So history doesn't repeat, but it rhymes. So
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  in that big fall, Amazon, for example, fell 90% too.
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  And it was selling for like $6 a share. But it
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  was growing its sales. It was growing its earnings. And Jeff Bezos famously talks
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  about that. So that was just like one of the best setups of all time. It's now $250 a
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  share. So why did this happen? Here's
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  what happened. There was massively low interest rates in the late 90s
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  that made debt cheap. Sound familiar? And
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  then venture capital peaked, right? At like 110 billion in
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  2000. So money was cheap, investors needed returns, and tech promised
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  them that. And that's what's happening now with cheap money from COVID and
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  AI transforming the world. So they invest
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  in extrapolate infinite gains, yeah? So all these traditional valuation
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  metrics just get thrown out. So It was
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  less about and even the Morgan Stanley guys They would often say that it
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  was less about the price targets and more about telling the crowd what
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  it wanted to hear And that's kind of what's happening, right? So
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  the P ratio of the Nasdaq on a 64 60 times
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  multiple when it had a long run average of say 20 Investors were
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  paying three times the normal price for all the earnings because it looked like
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  if you bought it was just gonna go up And every dip looks like an opportunity. That's why I've done
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  real time like, you know buying the dips a pretty dumb idea a lot of the time and Yes, and
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  the crash did take two and a half years So some that didn't sell
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  like some that sold right at the bottom there, too They held for a long time and
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  then sold at the bottom. And so The lesson isn't don't invest
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  in technology. It's you you would still become a Scrooge
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  now had you a bought Amazon and it fell and then went back up So
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  you would have right in fact the Nasdaq even since then has gone you
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  would have done fairly well But the lesson is, the price
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  you pay determines the return you get. It's not always about the
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  company, it's the price you're paying, right? A good
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  investment is a function of price and quality. And
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  so quite often you'll say, well this time it's different. And it's
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  not that different because it's very similar to what happened with railroads. Railroads at
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  a point in time in the 1800s or
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  1900s, it made up like 80% of the stock market. And
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  AI companies and technology starting to take
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  over a lot of the stock market. So it's rhyming. Right?
• 9:12
  Just quickly, if you're ready to take control of your finances but feel stuck on
• 9:15
  where to start, I have a solution. My book, Money Buys Happiness,
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  simplifies investing and wealth building with practical steps to help
• 9:22
  you achieve financial peace. Get your copy via the
• 9:26
  link in the show notes and let's get your money working for you. Now back
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  to the episode. And it all sounds rational until it's not. So
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  what's the difference between this AI bubble and the dot-com bubble?
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  What's the comparison? Let's look at the P ratio for the
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  S&P 500. The Shiller P ratio for the S&P 500 has exceeded 40. So
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  the last time it was higher than this was actually March 2000, the year
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  2000, when it hit 44. And the 10 largest companies, talking
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  about concentration, the 10 largest companies, domiciled
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  in North America, now make up 36 to 40% of the S&P 500. So
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  in the dot-com bubble, it was nearly 50%. It was actually 30%, so it's
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  even higher than that. Right,
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  30% in the dot-com bubble was, the S&P 500 was
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  built with tech stocks. Now it's more. Now they call
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  it the magnificent seven, right? So they've got a collective forward
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  P of around about 35, and the
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  average for those tech leaders during the dot-com bubble was 30. Does that
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  So it is very similar. Not quite the
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  whole 60 times multiple, but it's very similar, eerily similar.
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  Now whilst this is happening, Companies are famously burning money
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  on AI. I mean Mark Zuckerberg famously burnt burnt 80 billion. I
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  think it was on on meta They just disappeared. Bye-bye
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  that's happening now whilst that's happening Warren Buffett's also sitting
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  on 400 billion dollars of cash and now he's a net buyer
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  of stocks and he's not buying any so whilst we don't see
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  the same 60 times multiple in the Nasdaq and We
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  are seeing an AI revolution that's similar to dot-com promises. Measurable
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  adoption, money will be given in return, but everyone's figuring
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  out now that it's not the case, right? So if hyperscalers are spending like
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  $700 billion in AI infrastructure just in one year, and we're
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  not seeing a return for that, it's gonna come undone at
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  some point. Right? It will, particularly
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  when you've got companies like DeepSea kind of coming out and doing all that work that takes
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  a lot less money. So it's fairly fragile. It's hard to know
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  what's going to pop it. Maybe it's this oil embargo, this oil problem
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  in Hormuz Strait that's going to be the thing that pricks
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  it. Like, what if we can't get
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  a real return from the AI infrastructure spending? What
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  if we're just starting to see the beginnings of it too? So what if you say, well,
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  if I invest it now, it's gonna double in the next few years, but
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  then what if it falls by 80%? Very difficult to know, right?
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  So here's what the smart money did back then. and what retail
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  did. So what retail investors did in the year 2000 is, they bought
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  at the peak because prices only ever go up, they held through the 40% drop
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  because it'll come back, they held through the 60% drop, and
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  then they started to lock in losses. Because they couldn't bear it anymore, right?
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  And then they completely missed the recovery. because they got too burnt. What
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  the smart people did is they stayed diversified. They didn't concentrate into
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  one index or one sector. So those who held the S&P 500, not just the
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  NASDAQ, they recovered in 12, not 15. Those who held global indices recovered
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  a bit faster. And those who had some cash on the side were
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  able to take advantage of the price drops, right? So
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  you can turn disaster into opportunity if you've got the stomach for it and if you
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  understand financial history and you have the right time horizon. So you've
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  got to separate the technology from the valuations, and
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  you have to understand that if it happens and it falls, then you're going to have a huge opportunity, right?
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  So look what Warren Buffett's doing. Look at the dry powder that
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  he's got set aside. Have some dry powder. And
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  you can also protect yourself a little bit by dollar cost averaging in. So
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  over time, be in the market, be invested, dollar cost averaging over
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  time, keep some dry powder and understand financial history
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  so that if it happens again or when it happens again, I should say, you'll be
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  prepared for it. Because every storm runs out of rain, every
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  storm runs out of rain, every market recovers and it will
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  because the human We we
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  recover right we'll continue we'll start we'll keep innovating technology
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  will improve but don't be someone who just apes in
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  now and don't be surprised if it falls and and
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  you get freaked out and you sell at the bottom like a Fool don't
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  be that person. It's looking eerily similar And
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  we don't know what's going to happen. But beware of very easy,
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  cheap, fast money. It will always come back to
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  roost. Okay, so I hope that makes sense. 14 years to recover last time.
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  So don't be the one holding the hot potato for the next 14 years. Okay? Understand
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  financial history and how it impacts you as an investor, be it in the property
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  market, or in the stock market. History does
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  matter. So be a student of history, understand what has happened in
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  the past because it will dictate how you handle the future. So
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  I hope you've enjoyed that episode. If you're around in those times, I'd love to hear
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  or know what you think about it in the comments. So leave a comment below, ask
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  me a question, leave me a brutal comment. I don't care,
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  I'll come back and say hello anyway. And of course, share this with a friend if you wanna
• 14:21
  share it with someone. Thanks for subscribing to the channel. It's growing, we're getting there.
• 14:24
  It's a lot of fun. Thanks for your attention. See you in the next episode. Thanks for
• 14:28
  listening to Money Grows on Trees. If you enjoyed the episode, leave a five-star
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  review on Apple Podcasts and Spotify and subscribe to
• 14:35
  us on YouTube so you never miss an episode. And if you're serious about building
• 14:38
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• 14:42
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