Category Archives: Quarterly

3rd Quarter 2018 “Looking for Bubbles in all the Wrong Places”

Looking for Bubbles in all the Wrong Places

Eleanor Rigby – The Beatles

“All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
Ah look at all the lonely people
Ah look…”

Liquor, ladies and leverage for the retail investor

Legendary investor Warren Buffet likes to say there are three ways to go broke: Liquor, ladies and leverage. “It is crazy in my view to borrow money on securities,” he told CNBC earlier this year. “It’s insane to risk what you have and need for something you don’t really need.”

After a 10 year bull market in equities, private equity (PE) is now looking for all the “lonely people” who haven’t yet joined the alternative investment party. U.S. equities certainly aren’t cheap today, but there are other areas of the economy and investment world that are closer to bubble territory. In its insatiable hunger for more investors, PE is now pitching average retail investors—The Joe Sixpacks—as aggressively as lending companies served up zero down, no doc mortgages to the masses on the eve of the global financial crisis a decade ago. We all know how that story turned out.

Wall Street wants to help out average investors by offering them access to private investments

In a recent Wall Street Journal interview, Securities and Exchange Commission Chairman Jay Clayton, said the SEC wanted to make it easier for individuals to invest in private companies, including some of the world’s hottest startups. These “opportunities” were once reserved for institutional investors and ultra-high-net-worth individuals.

Wall Street wants to help out Mom and Pop investors by offering access to private investments

Dear Average Investor, Run like hell!

Matt Topley

Needless to say that even if the rules overhaul goes through, Joe Six Pack will not be offered the same type of private equity fund or venture capital fund that the Harvard Endowment is offered. I’ll also go out on a limb here and say these offerings may be a little too complicated for most investors to understand. Trust me. I’ve been working in the investment world for over 20 years and I still struggle to grasp the fees and valuations methods of the private world.

This latest development could well signal the top of the current private investment boom in the U.S. There are now 2,700 private market managers in business today, up from number of 502 less than 20 years ago. (Source: Preqin)This reminds me of the boom in hedge funds in the 1990s which saw the market grow to 12,000 managers from 500 in a short span of time. Not surprisingly, alpha disappeared as too many managers were chasing the same ideas. The same scenario could likely play out in the private world today.

As you can see in the chart below, hedge funds generated a lot of alpha during the 1990s when there were relatively few players in the market. But after 2000, the number of new hedge funds exploded and returns predictably went south.

Is private equity getting too big?

According to Cambridge group, PE returns have lagged the Russell 2000 by 1 percent and the S&P 500 by 1.5 percent for the past five years. In 2015, eight executives at the four publicly traded private equity firms (BX, KKR, CG and APO) made a collective $1.9 billion while shareholders in those same private equity firms lost a collective $13.7 billion.

Institutions are adding $200 billion per year to private investments, thus leaving private equity with $1 trillion in excess cash to spend. At, the end of the day, there are simply not enough deals at reasonable valuations to satisfy demand. It reminds me of 2008-09 when institutions piled into hedge funds just as their alpha generation was disappearing.

But, PE funds are not paid to hold cash. They need to pay high valuations with a big bet on future growth. Another big issue is that PE deals are debt dependent. The average PE deal is 65 percent debt-financed in addition to having an opaque valuation system.

How will a bear market in bonds affect private offerings?

As Daniel Rasmussen explained in American Affairs Magazine, PE firms typically double the debt on their balance sheets from 2.5-times EBITA to 5-times EBITA so they are significantly more levered than a typical public company. Rasmussen said studies from the Canadian Pension Plan Investment Board (CPPIB) and the Abu Dhabi Investment Authority (ADIA) found the average ratio of net debt to enterprise value at inception is around 65 percent. By contrast, the typical Russell 2000 small cap stock is levered at about 16 percent and the typical Russell 2000 large cap stock is levered at about 18 percent.

From where I sit, it seems we may finally be entering a rising rate environment as the 10 year U.S. treasury yield breaks out from a 30 year downtrend. If a bond bear market is underway, highly leveraged companies (particularly small companies with volatile cash flow) will be weighed down by the cost of debt. Also, high investment activity in the private world is driven by easy access to credit—something that may be getting harder for PE managers to get in the future.

On top of that, middle market growth companies, previously the most lucrative segment of the private equity world, are seeing the most competition as big PE firms move downstream in search of returns and as family offices increasingly bypass funds so they can invest directly in companies.

This trend has lowered estimates of future returns with longer holding periods.  Investors with recent vintage years now may be held up longer than the average American marriage lasts. Compare that to small cap value funds that often generate higher returns and can be redeemed within one day while costing only 25 basis points.

Two things may happening if we are truly entering a bear market in bonds:

  1. Investors that previously took on more risk in search of higher returns may now be content to park their money in tax fee municipal bonds paying at 5 percent interest, and
  2. Companies that rely on leverage will see their valuations sink.

The real leverage is private lending. 

 The Rise of Private Assets Is Built on a Mountain of New Debt

Credit businesses have helped drive the private-equity industry’s expansion, but things could get awkward when companies hit trouble. As Paul Davies explained in The Wall Street Journal: “In the world of private deal making, the biggest borrower in town is becoming one of the biggest lenders too. With so much money chasing buyout opportunities, big and risky deals seem the likely outcome.”

Davies also said that in recent years, private-equity firms have increasingly got into lending to buyouts, too—often lending to their own deals. As a result, their credit businesses are “adding to the huge growth in specialist private debt funds and retail money that has taken place in loan markets since the crisis. The flood of money into credit has driven down borrowing costs and cleared out traditional lender protections known as covenants on many loans.”

According to Pensions & Investments (P&I) Magazine, total commitments in 2017 to private lending were 617 percent higher than the $4 billion tracked by P&I in 2010.

Private credit funds now run three times as much money as they did in 2007. Although default rates are low, interest rates have been benign. On top of that, we know that most lenders will keep playing until the music stops. It appears the discipline in lending standards has broken down as “covenant lite” leveraged loans hit another record.



A private equity market, already bloated with record inflows, is now being offered to the general American public at a time when interest rates are moving higher and the investing discipline is breaking down. When you see a 600 percent increase in money flows, loan covenants disappearing and valuations hitting record levels, PE is not what the average retail investor needs in his or her 401(k) plan.

I have nothing against private equity. Many PE many firms have admirable track records and private equity is also an awesome space to drive the economy as capital flows to small business. But, everything runs in cycles. Money tends to flow to where it’s treated best–until the music stops. Now is a great time to be a seller to private equity, but I wouldn’t include PE in your 401(k) plan. 

Instead, wait until the headlines trumpet the death of private equity. As Warren Buffet likes to say: “Buy when there is blood in the streets,” not when it’s raining covenant lite loans and 14x EBITA buyouts. For all the lonely people who feel left out of cool private investments, save yourself a lot of money and stress: Go buy a small cap value fund at 25 basis points. You’ll sleep a lot better and have more in your pocket. 

Eleanor Rigby – The Beatles

“All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
Ah look at all the lonely people
Ah look…”

12 Questions That Will Change Your Financial Life

How well do you really know yourself and your relationship with money?

by Matt Topley

Key Takeaways

  • When it comes to your money outlook, you tend to be influenced by the five people you spend the most time with.
  • Commit to being a lifelong learner about personal finance and personal fulfillment. There’s a strong correlation between the two.
  • Don’t let your emotions get in the way of a sound financial plan—or life plan.
  • Be brutally honest with yourself about what’s most important in life. Eliminate distractions that prevent you from putting your energies where they truly belong.

Going through my summer reading pile the other day, I came across a great article by Ryan Holiday, called “12 Questions That Will Change Your Life.” Holiday, author of the best-selling book Ego is the Enemy, wrote 12 Questions for a general audience, but I’ve found they can be applied to investing, wealth accumulation and wealth preservation, too. You don’t have to read these provocative questions in order, but do yourself a favor and give each one some thought:

Q1. Who do you spend your time with? According to motivational speaker and business guru, Jim Rohn, we are the average of the five people we spend the most time with.

It’s been proven time and time again that people are the product of their environment. If you spend your time around people who constantly complain about money, who degrade rich people, who see money as the root of all evil or who will do anything to avoid a conversation about finances, then you’ll have a lower probability of growing your wealth than if you spend your time surrounded by people who have a healthy relationship with money.

That doesn’t mean you have to champion the “Greed is Good” philosophy made famous by Michael Douglas in the 1987 classic “Wall Street.” But, think about your closest friends and colleagues. Do they seem to have a positive relationship with money?  Do they inspire you to grow your net worth and pursue financial freedom by way of example? On the other hand, if your closest friends and colleagues are willing to accept an unhappy financial lifestyle, they will most likely endure an unfulfilling family and work life.

Q2. What does your ideal day look like?  One of the biggest benefits of financial freedom is that you can live your life on your terms—not on someone else’s terms. But if you don’t know what your ideal day looks like (both a workday and a weekend day), then how do you expect to experience it on a regular basis?  It’s important to take inventory of your financial life.  One of the best ways to do that is to spend a few hours a week increasing your financial literacy. It’s not about learning how to be a better stock picker. It’s about learning how to boost your career skills or starting a side business that can substantially boost your income.

Before diving in, it’s important to know how you learn best. Do you learn best by reading, by listening or by watching?  Whichever channels works best for you, spend an hour a day on it building your career skills and financial literacy.  Surely it’s worth devoting 60 minutes a day to something that will lower your stress and increase your pursuit of self-actualization.

READ: Barron’s, Wall Street Journal and Topley’s Top 10 blog.
LISTEN TO: Behind the Markets (Wharton Business Radio) and Barry Ritholtz’s Masters in Business podcast (Bloomberg)

Q3. To Be Or To Do?  Legendary Air Force colonel, John Boyd, used to ask trainees: “To be or to do? Which way will you go?”  Boyd wanted to know if the new recruits would be focused on the pursuit of success or choose to focus on a higher purpose?

The goal of financial freedom is not to acquire big houses, fast cars or expensive bling. It’s about acquiring the freedom of time so you can enjoy life and pursue a higher purpose. Finding a higher purpose takes time and contemplation. If you are just scrambling to pay bills all the time, you are not in a position to be thinking about your higher purpose in life. The stress hormone cortisol is public health enemy No. 1 and research shows that a sizeable percentage of Americans suffer from financial anxiety (see Question 12). Real tangible accomplishments happen only when your thinking is sharp and free of stress and distractions.

Q4. If I Am Not For Me, Who Is?  If I Am Only For Me, Who Am I? The alternative translation of that last part is “If I am only for me, what am I?”  The answer is “the worst.”  It doesn’t make you a bad person to want to be remembered, or climb to the top of your profession, or focus intensely on providing well for yourself and your family.  But, if this is ALL you want from life, then that’s a problem. Many successful people have strong gos and are driven by self-interest, pride, dignity and ambition–but they temper those traits with a sense of humility and selflessness.

Warren Buffett, no stranger to success, said that “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

I love Buffet’s quote and recently wrote a paper based on it (Investing Is a Psychology Game, Not an IQ Game). If you’re not careful, ego can be your greatest enemy in both investing and in life. Temper your investing life with a sense of humility and simplicity. This will give you the time and money for selflessness. Improving your personal financial life give you the time and money to change the world in a way that is most meaningful to you.

Q5. What Am I Missing By Choosing To Worry or Be Afraid? In his book, The Gift of Fear, Gavin de Becker suggests that when you worry, you should ask yourself: “What am I choosing NOT to see right now?”  What important things am I missing because I choose worry over introspection, alertness or wisdom?”

Obstacles in our financial lives make us emotional. The inability to keep our emotions in check is what often destroys net worth and can lead to fractured personal relationships and stunted careers.

Don’t let the stock market’s fickle gyrations fool you into making bad decisions. Don’t let Wall Street pundits and the financial media scare you with attention grabbing headlines.

When it comes to investing, things are never calm for long. Over the past 70 years, the S&P 500 Index has experienced twelve separate corrections of at least 20 percent. That’s an enormous amount of wealth wiped out in a relatively short time. But despite those frightening reversals, the index has gained a stunning 15,000 percent over that seven-decade time frame. Those who stayed invested and who didn’t try to get in and out of the markets have been handsomely rewarded for their discipline.

Meanwhile the average U.S. investor is barely keeping up with inflation (Sources: Richard Bernstein Advisors LLC, Bloomberg, MSCI, etc.). Why is it so hard for individual investors to keep up with inflation, let alone the unmanaged market index? Because many make emotional decisions at the wrong time—again and again!

The Greek word “apatheia” refers to the equanimity one gains when you are free of irrational fear and extreme emotion. Apatheia is one of the keys to successful investing and paves the way to a state of flow in your personal financial life. A fulfilling life revolves around doing meaningful work and having meaningful relationships. A stressful personal financial situation can destroy your ability to enjoy your work and relationships.

Q6. Am I Doing My Job?  The last thing that legendary college basketball coach, John Wooden, said to his players in the locker room before every game was: “Men, I’ve done my job; the rest is up to you.”

You may not be part of an elite basketball program or Fortune 100 company, but ask yourself if you are really doing your job each and every day? Remember, you can be extremely busy—working to the point of exhaustion–and still not be doing your job. You cannot be the best at your job when you are scrambling to pay the bills, fighting with your spouse over money matters, or envying a co-worker you think is more financially successful than you are. To operate at your highest level for career advancement, you must be in a state of mental flow. This flow state can only be reached when distractions are kept at a minimum. A healthy financial plan will limit distractions from many areas of your life—not just the money ones.

Q7. What Is the Most Important Thing? If you don’t know what the most important thing in life to you is, then how do you know if you’re putting it first? If you have personal financial stress, you will never have time or mental energy to focus on what’s most important to you because you will be constantly distracted by the negative weight of your money burdens. However, once you put your financial house in order, you will develop the quiet confidence to succeed in all aspect of your life. Seneca, the ancient Roman philosopher called that quiet confidence “euthymia”– the belief that you’re on the right path and that you won’t be led astray by people who are hopelessly lost.

Q8. Who Is this for? It doesn’t matter if you’re making something, selling something or trying to reach people, you have to know who your audience is. Great speakers, great politicians and highly creative people tend to have a good sense of who their target audience is. So can you.

Creativity is the key to self-improvement and career growth. In order to be creative you need to generate a LOT of ideas. They won’t all be winners, but you need a clear mind and long periods of uninterrupted thinking time to come up with a diversified portfolio of potential ideas so you can consistently develop good ones. Clearing your mind of financial worries and other distractions is the key to getting into your flow state—a mindset in which you do your best thinking and achieve real breakthroughs.

Q9. Does this Actually Matter? Given the shortness of life, does this thing I’m thinking about, worrying about, fighting about, throwing myself into even matter?  Sadly the answer is usually no.

As Coach Wooden always told his players: “Learn as if you were to live forever; live as if you were to die tomorrow.”

If nothing else, don’t get stressed about short-term market volatility and the media hysteria around it. All that matters is your long term financial plan and preserving wealth for yourself, your family, your heirs and the causes you support. As get older, I realize more and more that money is simply a tool for making the most of our brief time on earth. Making money for the sake of making money’s will just keep you on the hamster wheel forever.

“You could leave life right now,” the second century Roman emperor, Marcus Aurelius reminded himself, “Let that determine what you do and say and think.”

Q10. Will This Be “Alive Time” or “Dead Time?” At the end of the day there are only two types of time: Dead Time and Alive Time. Dead Time is when we are just waiting and Alive Time is when we are learning and active.

Resist the temptation to get distracted by Wall Street pundits. Don’t let them sway you into chasing the next hot stock or sector. Don’t let them talk you into getting in (or out of) the markets at EXACTLY the wrong time (see danger of market timing in Question 5).

Case in point
: During a recent eight-day span, research found that the big three cable news networks had over 600 stock market pundits on the air—that’s about 75 different “talking heads” tugging at your ego and emotions every day. Behavioral finance research proves how hard it is to predict markets accurately, but still we are exposed to thousands of gurus a month through conventional and social media. Use your Alive Time to become a smarter investor, to get better at your profession, to become a better parent, to read and to exercise regularly. Don’t allow your Alive Time to become Dead Time by trying to predict the unpredictable (think weather, stock market, natural disasters or traffic accidents, etc.).

Q11. Is this Who I Want To Be? Our minds have a unique ability to make the distinction between what we do and who we are. The problem is you can’t be a good person if your actions are consistently bad. People make bad decisions when they’re under fiscal duress, often falling into what we call “the triangle of corruption:
Need + Justification + Opportunity.

Unfortunately, sociopaths aside, the triangle is where people get themselves into trouble. By keeping your financial house in order, you can prevent the triangle from swallowing you up. You are what you do. Regardless of what you happen to be doing, always ask yourself, “Is this reflective of the person I want to be?”

Q12. Man’s Search for Meaning. Viktor Frankl, a renowned Austrian neurologist and Holocaust survivor, said life demands that we always answer the question, “What Is the Meaning of Life?” He said we answer that existential question with our actions and decisions.

After examining 65 studies on debt and mental health, researchers from the University of South Hampton concluded that people in debt are three times as likely as those who are debt-free to have a mental health problems. Those problems can range from drug and alcohol dependence, to depression, anxiety disorders and psychotic disorders. That’s a scary statistic considering that more than one-third of Americans have delinquent debt according to the Urban Institute.


Surround yourself with people who have a positive outlook on life and a healthy relationship with money. Control what you can control and let everything else go. Finally, if you are to find the meaning of life in your actions and decisions, then debt and financial worries are clearly things to avoid at all costs.

About the author

Matthew Topley is the Chief Investment Officer of Fortis Wealth in Valley Forge, PA and a 2018 winner of the Philadelphia Inquirer “Influencers of Finance” award. He authors the daily blog Topley’s Top 10.


Fortis Advisors is a wholly-owned subsidiary of Fortis Wealth and is a registered investment adviser with the Securities & Exchange Commission.

This presentation outlines research and is not an offer to sell or a solicitation to buy any securities. This is intended for the general information of the clients or potential clients of Fortis Wealth. Any investment information does not consider the objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, a client must consider its suitability and seek professional advice, if necessary.

The material contained herein is based on information we believe to be reliable, but we do not represent that it is complete or accurate, and it should not be solely relied upon as such. Any opinions or suggestions as of the date written may change without prior notification.

No part of this material may be copied or duplicated in any form by any means and may not be redistributed without the consent of Fortis Wealth.

If you would like to receive a copy of our Form ADV Part 2a or any other information,
please contact Matt Topley at, or call (610) 313-0910.

Additional information about Fortis Advisors is also available on the SEC’s website at

There’s Still Time to Take the Road You’re On, but It’s No Guaranteed Stairway to Heaven

“There’s still time to change the road you’re on”

Led Zeppelin

‘Stairway to Heaven’


Stairway to Heaven

Led Zeppelin

There’s a lady who’s sure
All that glitters is gold
And she’s buying a stairway to heaven
When she gets there she knows
If the stores are all closed
With a word she can get what she came for
Oh oh oh oh and she’s buying a stairway to heaven

Key Takeaways

  • Just four stocks have accounted for 84 percent of the S&P’s upside in 2018.

  • Defensive sectors account for a historically small part of the S&P’s current market cap.

  • The large gap between growth and value stocks is not sustainable long-term.

  • Growth stocks have outperformed value stocks for extended periods six times since 1945….each time, that run was followed by a significant recovery in value stocks.

  • Even if the yield curve inverts, there should be plenty of opportunities for savvy investors.

The first chart to start this quarter’s letter looks more like a stairway to hell. It depicts the composition of traditionally defensive sectors (utilities, telecom, pharma, consumer staples) as a percentage of the S&P 500 index. Representing a record-low 11 percent of the index’s total market cap today, defensive sectors have sunk below levels last seen during the internet bubble era of early 2000.

In my early adulthood, it was a safe bet that you were staying out too late when the rock classic “Stairway to Heaven” came on the bar’s sound system at closing time. But, as an almost-50 year old reading Led Zeppelin’s iconic lyrics today, I can see why “Stairway to Heaven” is a perennial fixture on classic rock Top-10 lists.

As longtime advocates of sector rotation, you could say our firm’s investment philosophy is driven by the Zeppelin refrain: “There’s still time to change the road you’re on.

Throughout my Firm Letters over the past three years, I have defended the bullish case against Trump election doomsayers, mini-bubble procrastinators and comparisons to the 1999 tech crash.  However the conclusion of my Q4 Letter of 2017 (It Ain’t Over, but the Fat Lady is Warming Up) hinted that the bull market was entering its “euphoria stage.” And now in the second half of 2018, it’s clear we are seeing a historically large spread between growth stocks and value stocks.

As tech weightings in indices move higher, defensive sectors are halved

Equity markets: The relative weight of defensive stocks (such as utilities) in the S&P 500 continues to trend lower. As you can see in the chart below, there has been a clear break through the Internet Bubble lows of 2000.

The last time we saw such a giant gap between defensive sectors and the rest of the market, that spread was erased quickly during the unraveling of internet stocks at the beginning of this century. Unlike the dot-com era, we do not have a rampant IPO market of zero-revenue “story stocks” today, but we do have massive gaps such as FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) outperforming traditional value sectors by over 700 percent during the last five years.

As some of you may know, I started my trading life in 1997 at an earnings momentum shop that focused on tech stocks. My introduction to Wall Street was trading tech stocks and other high growth sectors during the internet bubble. As mentioned in my past letters, we are not experiencing anything like the internet bubble today. If anything, that risk is found in the venture capital and private equity world today, not in the hands of public market investors. However, we are experiencing a historically large spread between value stocks and growth stocks that will eventually revert to the mean.

The last giant gap between growth and value stocks

When gaps between growth and value form like they did during the dot-com boom (see chart below), they are reflected in valuation spreads.

Spread between growth and value hitting record highs

 2007-2017 Russell 1000 Growth +182% vs. Russell 1000 +96%

Right now, U.S. growth stocks are trading at a 59-percent higher price-to-book ratio than U.S. value stocks are, and they’re trading at a 67-percent premium to U.S. small cap value names.

The largest spread right now is an almost 80-percent price-to-book premium for U.S. growth stocks over emerging market value stocks. The majority of capital asset pricing models (CAPM), which are strictly math-based, predict that emerging markets will be the highest performing asset class for the next 10 years–if you can stomach the volatility. Emerging market valuations are relatively cheap and middle class growth projections are positive, but debt levels in U.S. dollars are high, hence the recent 20-percent correction around a 7-percent rally in the U.S. dollar relative to other currencies.

Source: Vanguard

During my early trading days in the late 1990s, there was talk about a new world order in which value-oriented Benjamin Graham advocates were no longer relevant. Today there’s talk about a new world order in which technology-driven whiz kids will dominate the markets. Artificial intelligence, robotics, internet of things, intelligent agents and virtual reality are all part of the “fourth industrial revolution” that is changing the world. But, as often happens, there may be far more losers than winners in this race to the top.

As the market continues to narrow and a small number of names drive all the alpha, you start to hear comments like these from new world order investors:  Value investing is a lost cause.  That’s not surprising when just four high-flying tech stocks–AMZN, MSFT, NFLX and AAPL–have been responsible for 84 percent of the S&P’s entire upside for the year-to-date.

But, as Barron’s predicted in March, the big valuation gap between growth and value funds indicates a value comeback.

Growth manager vs. value manager

On the other side of the aisle is mid-cap growth fund manager Michael Lippert, who has a 7 percent weighting in Amazon (AMZN) in his $308 million Baron Opportunity fund (BIOPX). Value investing is a lost cause in today’s high-tech, winner-take-all economy, according to Lippert. “The world we live in today—is haves and have-nots, and there are way more have-nots,” he said. “There are so many industries being disrupted by the digitization of the world; it’s hard to make cyclical bets on have-not value stocks.”

Those conflicting viewpoints have led to a stark contrast between the valuation of Baron Opportunity’s and Heartland Value’s portfolios—and their respective performance. According to Morningstar Direct, Baron Opportunity’s stocks have an average trailing 12-month price/earnings ratio of 42, compared to Heartland Value’s 7. Baron Opportunity’s five-year annualized return of 14.2 percent is double Heartland’s 7.1 percent. Small wonder, as market darlings like Amazon, Alphabet (GOOG), and Tesla (TSLA) dominate Lippert’s portfolio.

Bloomberg ran a story last year about Goldman’s Death of Value Investing report. Just last week, Barron’s ran an article about the demise of value investor David Einhorn: “For ‘King David’ Einhorn, a Steep Fall.”

Headlines like these remind me of late 1999 when Barron’s asked: “What’s Wrong, Warren?” The article suggested that legendary value investor, Warren Buffett, was losing his magic touch. During the 20-month period ending in February of 2000, the Nasdaq was up 145 percent, while Buffet’s Berkshire fund was down 44 percent — a mind-bending 189 percent streak of underperformance for the Oracle of Omaha, at least compared to Nasdaq’s growth-oriented technology stocks.

My good friends at Alpha Architects explained why. Growth stocks have outperformed value stocks for extended periods six times since 1945….and each time, that run was followed by a significant recovery in value stocks. Timing this rotation is impossible, but we are getting close to record spreads in valuations with interest rates rising and unemployment at record lows.

Growth has outperformed value six times since 1945

Many believe that an inverted yield curve, in which short-term interest rates are higher than long-term rates, is a reliable indicator of a forthcoming recession. The difficulty with the inverted yield curve is that stocks tend to do really well when the curve flattens, as is the case today. Stocks also tend to do well shortly after the curve inverts. But, today the defensive sectors that are lagging now have huge outperformance in a down market.

We highlight quickly that none of our 5 recession indicators are flashing yellow or red…Then discuss how momentum is a sector/asset class rotation strategy

Chart shows sector performance when yield curve inverts (Fortis #1 recession signal).  Even in recessions, the sector divergence is striking.  The past 4 defensive periods show healthcare and consumer staples outperforming the S&P 500 Index by 40.5% and 33% respectively.


The difficulty with reversion to the mean is that you can go broke waiting for market to express itself fundamentally back toward value.  Right now, our five recession indicators are all green with none showing signs of an imminent implosion. What’s more, our technical momentum indicators all point to U.S. growth stocks maintaining leadership.

At Fortis we believe in evidence-based academically-backed research. With this philosophy leading our investment thesis, we conquer the challenges discussed in this Letter by combining momentum stocks and value stocks. The reasons behind this strategy require a much longer discussion, but please feel free to contact me any time (610-233-1074) to discuss in more detail.

In the end, there are “two paths you can go by” in market-growth or value. Right now we are experiencing historic spreads between the two. As has happened throughout history, the new pundits arrive singing the death of one path–in this case value–due to the permanent triumph of the other, in this case growth.

Remember back in 1999 when the “talking heads” were predicting the end of Warren Buffet’s value strategy? Remember after the 2008 crash when the S&P hit a generational low 650 and the same talking heads were predicting the end of growth in America?  The Stairway to Heaven for the last decade has been growth stocks, but every elevator has a top floor.

As Warren Buffet likes to say, “Predicting rain doesn’t count, building Arks does.”

If there’s a bustle in your hedgerow
Don’t be alarmed now
It’s just a spring clean for the May queen
Yes, there are two paths you can go by
But in the long run
There’s still time to change the road you’re on
And it makes me wonder

Stairway to Heaven

-Led Zepplin

Fortis Wealth 1st Quarter Letter 2018

Technology Faces Its Machivellian Moment

Tech stocks have been letting the good times roll for five years

Good Times Roll – The Cars

Let the good times roll
Let them knock you around
Let the good times roll
Let them make you a clown
Let them leave you up in the air
Let them brush your rock and roll hair


  • Despite the headlines, technology sector remained the top performing sector in Q1 2018.

  • Is the tech sector expensive, or just FAANG stocks?

  • The volatility we’ve experienced in 2018 is NOT abnormal from a historical perspective.

  • Sector rotation to defensive companies has not yet happened.


Remember Sonny the Boss in the movie “A Bronx Tale”? A big fan of Machiavelli, Sonny asks the ultimate Machiavellian question: “Is it better to be loved or feared?”

Sonny made his choice in the movie, as all of us must, and it depends on your circumstances. To my way of thinking, in Sonny’s line of work (organized crime), it is much more important to be feared. Sometimes you can be both loved AND feared, but only for a short period of time. Eventually the single dominant characteristic (loved or feared) will surface.

The just-completed NCAA Men’s Basketball Tournament was a great example of a team that was loved then feared. Loyola of Chicago, a private Catholic University rarely mentioned among the nation’s elite college basketball teams, knocked off one heavy favorite after another on an unlikely

run to the national semifinals. The Ramblers captured hearts of sports fans everywhere with an undersized roster of humble, selfless players including two lightly recruited guards that have played together since 3rd grade.

Then there was Loyola’s telegenic spiritual advisor, Sister Jean, a 98-year-old wheelchair-bound nun who confounded the basketball experts and lit up the national TV cameras after each game with her smile, moxie and bold predictions. Last weekend, on Easter Eve, the Ramblers had joined big blue chips Michigan, Villanova and Kansas in the national semi-finals, marking the school’s first appearance in the Final Four since 1963.

Ultimately, the Ramblers didn’t win it all, but as but as they busted their way through the brackets, the “Cinderella” team wasn’t just lucky. It used steel tip boots and a killer instinct to sink fear into the hearts of much better known, better funded opponents. In short, the Ramblers were easy to love—unless you had to play them.

The way I see it, in today’s stock market, the technology sector is going through the same tug of war between being feared and being loved. As Sonny’s character says: “It’s nice to be both; but it’s very difficult.”

The technology sector has led this epic nine-year bull market in concert with consumer discretionary stocks. Tech stocks now account for a whopping 25 percent of the S&P index weighting. (source:

More importantly, the five largest technology and internet stocks account for more than 14 percent of the S&P 500 index weighting. Investors are struggling to reconcile their love of tech products (and earnings) with their fear of tech’s lofty valuations. That’s the conundrum. Is the entire tech sector overvalued or just the dominant FAANG stocks (Facebook, Apple, Amazon, Netflix and Google)?


Source : Daily Forex


Source: Semper Augustus Investments Group LLC


The volatility we experienced in the year’s first quarter may have been unsettling, but many investors are out of practice feeling nervous. In my opinion, the volatility was actually quite normal in light of the exceptionally calm year we had in 2017. At the end of the day, market returns come down to earnings. Nearly 90 percent of tech stocks beat their revenue estimates in the 4th quarter of 2017—tops among all sectors. In fact, it was the best quarter for tech stocks in five years and CIO expectations for tech spending were at the highest level in 14 years, according to a Sanford Bernstein survey of chief information officers.

Is it better to be loved or feared?  For technology stocks, 2018 will tell the story.

It appears based on technology stock revenues and earnings, the near term looks positive for the sector. But it seems that the same Wall Street pundits and analysts touting international economic growth are the ones tilting negative on tech valuation. That’s further puzzling since the tech sector gets over 50 percent of its revenues from international markets.


Tech valuations do not appear to be significantly richer than the overall S&P 500 index.


I started my career in 1997 on a trading desk during the height of the Internet bubble. My firm was a small-cap tech-oriented shop, so my introduction to the world of trading was a technology-stock version of baptism by fire. Regular readers of this letter know I don’t like making predictions, but I have to get this one off my chest: If you ask me, today’s market is absolutely nothing like the 1999 bubble!

I remember those exuberant dot-com days like they were yesterday. Once, while waiting for my car to be serviced in 1998, the mechanics kept running off the shop floor to check their diagnostic computers in the main office. At first, I feared my car was in big trouble, but I later learned the mechanics were using the office computers to day-trade stocks.

Back then we heard stories of landscapers routinely leaving their jobs to day-trade at 100-to-1 intraday leverage. And today, we believe these same investing amateurs, having been burned, keep all their money at Vanguard and swear by passive indexing.

Granted, tech sector valuations are not cheap today, but I find it’s tough to support an argument that we’re in bubble territory. The P/E for technology stocks is 19-times next year’s earnings. Compare that to a 17.7x multiple for the S&P 500 index and a 54x multiple for tech stocks during the March 2000 bubble. Even after a torrid start in 2018, tech stocks trade on par with their 20-year price-to-book ratios relative to the S&P 500. And based on price-to-earnings ratios, tech stocks carry a valuation that is 22 percent below their 20-year historical average relative to the S&P 500.


This article in MarketWatch helps put tech valuations into perspective


         PICTURE 1 (1983-2000)                       PICTURE 2 (2000-2017)



The debate over offense vs. defense is not just for basketball in March. The most offense-minded sector (technology) has pulled off one of the biggest blowouts in market history relative to the defensive-minded consumer staples sector. As the chart below shows, over the past half-decade, Tech has outpaced Consumer Staples by a whopping margin of 158 percent to 33 percent—reminds me of a UCLA basketball score from the late 1960s and early 1970s.


The chart below shows the tech sector in red and the consumer staples sector in blue.

See Eddy Elfenbein, Crossing Wall Street for more


See sector leadership history below when the yield curve inverts



When the next bear market hits, it’s likely defensive sectors will take leadership and new sectors will spearhead the next bull market. Markets are an exercise in rotation. The way I see it, there is always a bull market somewhere–timing and emotion is what matters most.  When will value stocks take leadership over growth stocks?  Will international outperform domestic over the next three years?  When is the next sector leadership rotation?  Will techfall from the top sectors?


So, is it better to be loved or to be feared?  The jury’s still out on that question, but as Sonny the Boss would say, “It’s tough to be both.”

Technology stocks may be over-loved at the moment, but paralyzing fear is what prevented most investors from buying them when they were at bargain basement prices a decade ago. Right now, it seems tech valuations are high, and investors are following classic behavioral finance patterns:

They’re “following the herd.” For instance, in the first quarter of 2018, tech had the highest sector inflows since 2000.

We live in a global technology driven world in which many jobs and tasks, not to mention employees, are being replaced by technology. This has led many people to question whether the five dominant FAANG stocks have become modern day monopolies.  The conundrum is that the rest of the tech sector aside from FAANG stocks is expensive–but not in a 1999 Bubble kind of way. How do you rectify this in a world that’s being rapidly divided into learners and non-learners?  Especially when the learners are technology driven.

Is the tech leadership real or an illusion?  We shall see in 2018 if the good times continue to roll.

Good Times Roll – The Cars

If the illusion is real
Let them give you a ride
If they got thunder appeal
Let them be on your side

Let them leave you up in the air
Let them brush your rock and roll hair
Let the good times roll
Won’t you let the good times roll-oll
Let the good times roll

Let the good times roll
Won’t you let the good times roll
Well let the good times roll
Let ’em roll (good times roll)













Infatuation – Bubble Spotters are Obsessed with Another Debt Crisis


Oh no not again
It hurts so good
I don’t understand

Rod Stewart

Key Takeaways

  • Total student debt, credit card debt and auto loans have each passed the $1 trillion mark in the U.S.
  • Eventually we will have a good old fashioned cyclical recession with a secular bull market—a crash or bubble burst is not likely.
  • Don’t let the headlines or recency bias cloud your thinking. Stick to your long-term plan.

Oh No, Not Again.
It Hurts So Good.
I Don’t Understand.

American Investors Have a New Obsession with Bubble Spotting.

In classic Wall Street storytelling, a Master of the Universe makes a fortune for himself and a small group of investors through an unpredictable cocktail of IQ, testosterone and hubris. This strategy is usually executed through huge bets placed on certain companies, bonds, real estate, etc. that work in exponential fashion, thus catapulting the Master to celebrity status in American culture. Remember “Greed is good”? Remember Michael Lewis’s novel about Wall Street traders that wagered $1 million as a side bet on a game of “liar’s poker” during the work day while tens of millions worth of bonds were traded around them? Americans love to hear how down-to-earth stock pickers like Warren Buffett and Peter Lynch choose their winners. Americans also love the Wall St. antiheros like “Predators Ball” junk bond raiders, or Jim Cramer, host of the frenetic CNBC show “Mad Money,” that is part vaudeville part, mad scientist act.

During the 2008 financial crisis, the titans of The Street were no longer bold traders, but a group of unknown hedge fund managers that made a fortune betting against the market. Books and movies would follow about how those savvy contrarians who predicted a short circuit to the American Dream—a disaster that took the mightiest country in the world to the brink of complete financial chaos.

Most citizens have no idea how close we came to the temporary collapse of the banking system and world capitalism. This terrifying scenario was driven by an enormous mountain of debt attached to a pillar of the American Dream—people’s homes. The crisis also led to a new financial super sport called “bubble spotting.”  After the crisis, every young MBA/CFA/hedge fund manager wanted to be the next Michael Berry or Steve Eisman who could find the next “Big Short.” Meanwhile, the second biggest bull market in history emerged from the crisis, and passed half of the nation’s investors by as they remained shell-shocked from the near-meltdown of 2008-2009.

I just finished reading Roger Lowenstein’s fabulous biography of Warren Buffet (Buffet – The Making of an American Capitalist) featuring thought-provoking descriptions of Buffet’s personal life that formed his controlled temperament for investing. One part of the book made me muse over today’s market—did you know that that it took Wall Street veterans 25 years to become bullish again after the 1929 crash. That’s right. Twenty-five years! The scars were so deep from the Great Depression that even Buffet’s hero, Benjamin Graham, the scion of value investing, questioned his entire thesis about putting one’s money into low-cost value stocks. Echoes of 1929 have followed the most hated bull market in history as it roars through its eighth consecutive year. Yes, valuations are on the high end of the spectrum and a correction may be due. But a bubble-like crash is another story.

Most of “today’s crash” predictions revolve around debt implosions that are due to a simple behavioral finance ailment called “recency bias.”  Recency bias is a phenomenon in which people are significantly more affected by recent events in their lives than they are about past events. The 2008 financial crisis left people’s homes, stock portfolios and work lives at half-mast. The debt bubble in housing is still so fresh in the minds of American citizens that they are acutely sensitive to anything that seems like excessive debt.

Our firm is working with a consultant to help us tell our story. It may surprise you that the consultant wants us to share negative (not positive) stories about our clients’ lives. The idea is to tug at heart strings and to find a connection through negative events. Human psychology (and the news media) dictates that “if it bleeds it leads.” Just look at the recent July 4th holiday. We live in the greatest country in world, and even on our nation’s Independence Day, the news was full of negative stories. As always, people can’t turn their eyes away from a car crash. Our financial car crash is now bubble spotting: Muni debt, Japan debt, China debt, student loan debt, car loan debt, credit card debt, etc.

Today I want to tackle three current bubble spotting myths.

A Trillion Here a Trillion There. Pretty Soon We Are Talking Real Money.

Student debt, credit card debt and car loan debt have each crossed the $1 trillion mark in the U.S. Not that long ago, one billion dollars was considered a lot of money. But, that’s like comparing Magic Johnson’s $2 million a year NBA salary from the 1980s and 1990s to Steph Curry’s $80 million annual pay today.

Let’s tackle each bubble myth one at a time and apply some second level thinking. Big numbers like $1 trillion grab headlines, but the truth lies in the details.

1. Student Debt

Many believe these lazy generation Y kids (born in the 1980s or early 1990s) will never move out of their parents’ basements because they are so sacked with student debt and useless undergrad degrees in philosophy. Personally I think philosophy is a great major, but that is beside the point. We are graduating the highest percentage of college students in U.S. history and we have a majority of women not only graduating from college, but doing so at the top of their class. This isn’t a just good thing; it’s an awe-inspiring movement to a more educated society. It also means we are preparing a work force for an increasingly complex, tech-driven service economy. While this progress could make the class divides in our society even greater, that is a topic for a different paper.

Most articles written about the dangers of student debt start with a scary chart like the one below. You’re supposed to think to yourself: “Oh no. Another crash is coming!” My favorite is when the media overlays the student debt chart with the NASDAQ 1999 chart.
Instead, this chart below is a reflection of the largest generation in American history coming into its prime college years. It also shows the democratization of education in America. But, the media will paint the picture more negatively, inevitably describing a tale of woe about a 20-smething waiter who has no career path and $200,000 in student debt. But, how many of these extreme examples exist? Again, the devil is in the details.

Underneath the daunting $1 trillion chart is a much more manageable number–two thirds of student loans (66%) are smaller than $25,000. What’s more, the average monthly payment on a $25,000 student loan is a manageable $280. And, the current unemployment rate for college graduates is a stunning 2.5 percent. Even more salient is the fact that 85 percent of student borrowers owe less than $50,000 on their loans.

Unemployment for college grads 25 and over 2.5 percent and the first wave of Boomers turns 70 this year, so Millennials will be replacing their parents in the workforce for the foreseeable future.


Is student loan debt an issue? Yes. It will delay homeownership and household formation for many young graduates. But, calling student debt a bubble that’s big enough to threaten the U.S. economy is a stretch. Comparing student debt to the 2008 housing bubble or the 1999 dot-com bubble is an absurdity.

2. Credit Card Debt

Credit card debt also hit the $1 trillion threshold this year, but consumer debt service is at all-time lows while sub-prime mortgage debt has disappeared from the landscape. Americans’ finances are actually in the best shape they have been in years. As a group, the debt-to-income and debt-to-asset ratios of American households in the first quarter fell to their lowest levels since the early 2000s. A prolonged period of low interest rates has made that debt easier to bear. The Federal Reserve reported recently that households’ overall debt-service ratio—the share of after-tax income going toward debt payments—is near historic lows.

Yes, we have more credit card debt than ever. Just remember that 70 percent of GDP is consumer spending and the economy is still humming along with personal balance sheets that are not yet stretched. At some point, we will have a recession, but until then, credit is helping to drive consumption. It’s true that charge-offs from credit card companies have ticked up. But, calling today’s credit card situation a threat to the economy is tough to fathom as charts like the one below demonstrate.

Low interest rates and the re-set from mortgage crisis leaves consumers debt service at historical lows.

3. Car Loans

Americans have had a love affair with their cars ever since President Eisenhower signed the Federal Highway Act in 1956. That’s what many say opened the suburbs to the urban masses and sparked commuting across the U.S. via family sedans. Car sales have ebbed and flowed with the economy ever since they became a big part of our free market system. Today’s consumers aren’t much different from those in the 1950s. But, here we are at $1 trillion mark in auto debt and a recent uptick in sub-prime auto delinquencies has sparked a spate of bubble headlines.

Those stories usually include misleading bubble charts like the one below.

There is a major problem with the sub-prime auto bubble thesis, however. Although borrowers with lower credit ratings make up 20 percent of the auto market today, they are a pimple on the rear end of the U.S. economic elephant. In 2014, roughly 14 percent of mortgage debt was delinquent or in foreclosure. In other words, around $1.5 trillion of debt was considered “troubled.” By comparison, lenders reported that about $23.7 billion in auto loan debt was delinquent at the end of 2016. That’s 1.4 percent of the sub-prime mortgage debt crisis and less than the total NBA salary cap. Warren Buffet alone is sitting on $100 billion in cash, so he could take down an implosion of sub-prime car debt all by himself in just one hour.

The growth of subprime auto loans is significant, but not a threat to larger economy.


As Howard Marks, my favorite Wall Street second level thinker says, “Most things will prove to be cyclical.”  American pundits have a new obsession with bubble spotting that’s reminiscent of the post 1929 crash. Although we are closer to the end of the economic and bull market cycle than the beginning, be wary of the soothsayers selling crash theories. Exponentially more people lose money by missing the 100 percent gain that typically follows a correction than who avoid the 20 percent loss that accompanies a correction. Over the past 70 years the S&P 500 index has experienced 12 corrections of 20 percent or more and the index is still up 15,000 percent over that period. Yes you read that correctly—UP 15,000 PERCENT!

The market has had corrections of at least 5 percent in 88 out of the past 89 years and has had 10-percent corrections in 67 out of the past 89 years. So, statistical probabilities favor a pullback in the near future. But, instead of worrying about tiny bubbles, just understand that our next crisis will be a good old-fashioned cyclical recession in a secular bull market.

At Fortis, we are closely watching the yield curve for signs of a recession, as well as accelerating inflation, rising initial jobless claims and rising inventory-to-sales ratios. We are ignoring all bubble oracles as they have swept MBA schools with tales of 2008 short-selling glory and have created a thundering herd of financial asset blimp astrologers.

One thing does scare me, however. I don’t know anyone who is bullish right now.

Caught me down like a killer shark
It’s like a railroad running right through my heart
Jekyll and Hyde the way I behave
Feel like I’m running on an empty gauge

Oh no not again
It hurts so good
I don’t understand

Tiny Bubbles – July 2017

Key Takeaways

  • Politics change, management teams change and taxes change, but human nature never changes.
  • The U.S. will see another 1999-type bubble, but those conditions do not exist in today’s tech market.
  • Only one thing scares me right now about the stock market: Everyone I know is bearish or waiting for a pullback rather than seeking out opportunities.

“Tiny Bubbles”

Tiny bubbles (tiny bubbles)
In the wine (in the wine
Make me happy (make me happy)
Make me feel fine (make me feel fine)

Don Ho


This long-running hot streak in the tech sector has led to forecasts of another 1999 bubble. It has sparked future doom from a host of soothsayers, who have been waiting for their gloomy predictions to come true since the global financial crisis ended in 2009. Since the crisis, today’s Wall Street Masters of the Universe are not the traders popularized in Michael Lewis’s original book “Liars Poker.” Nor are they the superstar investment bankers of the Internet boom. Instead, they’re a bunch of unknown hedge fund managers that predicted a crash in 2008 and made a fortune in its aftermath.  Since that event, headline grabbers on Wall Street have shifted from tireless cheerleaders of the rising bull market to pessimists predicting the next crash.

I just finished a fabulous Warren Buffet biography by Roger Lowenstein titled Buffet-The Making of an American Capitalist that provided many thought-provoking descriptions of Buffet’s personal life which help explain his controlled temperament for investing. One part of the book that made me muse over today’s market was the observation that Wall Street veterans took 25 years to become bullish again after the 1929 crash. The scars were so deep then that even Benjamin Graham, the scion of value investing and Buffet hero questioned his entire thesis about value investing. Echoes of 1929 have followed the most hated bull market in history as it roars through its eighth year. Valuations are indeed on the high end and a correction may be due in the near future, but a bubble crash is another story.

I started my career on the trading desk in 1997 during the height of the Internet bubble. My firm was a small cap tech-oriented shop, so my trading introduction was baptism by (technology stock) fire. I will deviate from my mantra of not making predictions right now and just say that today’s market is absolutely nothing like the market we had during the 1999 bubble. In 1998, I remember one day waiting patiently for my car to be serviced and the mechanics kept running on and off the shop floor to check the computers in the main office. They weren’t looking at diagnostics for my car. They were day trading stocks and landscapers were leaving their jobs back then to be day traders at 100-1 intraday leverage. Today these same citizens, hopefully wiser, have moved all their money to Vanguard and now swear by passive indexing.

Today’s tech sector valuations are certainly not cheap, but it’s a tough argument to say they fit the bubble label.  The P/E ratio for technology stocks is now 19-times next year’s earnings, vs. 17.7x for the S&P 500. Compare those ratios to a 54 PE during the March 2000 bubble. Even after the torrid start to 2017, tech stocks trade on par with their 20-year price-to-book ratio relative to the S&P 500. But, based on price-to-earnings, they carry a relative valuation that is 22 percent below their 20-year historical average relative to the S&P 500.

In 1999, the Nasdaq doubled in value as investors bought tech stocks at the expense of every other sector and the index dropped at least 2 percent on 40 different days that year. That’s a very different environment from the record low volatility we have today. In 1999, people were cruising around my parking lot at work with personalized license plates boasting ticker symbols like QCOM (Qualcomm). Do you really see that today?

IPO Market Comparison

Let’s start by comparing IPO markets of the dot-com era to today. In 1999, we had 446 tech IPOs and in 2000 we had 333 tech IPOs. By contrast, we had just 98 IPOs in 2016.

The average first-day returns for the 1999-2000 IPO market were 64 percent compared to 14% between 2001 and 2015.  In 1999 and -2000   three out of four (75%) new offerings were tech stocks compared to just one in four (27%) today. Also the small company IPO market (for companies with under $50 million in sales) has almost disappeared from the marketplace as private equity has filled the gap. In 1999 and 2000, three out of five IPOs (60%), were for companies with under $50 million in sales. Today that number is closer to one in twenty (5%) of deals.

Average First Day Returns IPO Market


Average First Day IPO Returns

 Top 1-Day “Pops” in 1999.  When was the last opening day IPO that looked like this table below?

Here is the latest 2017 tech IPO that came with no profits- Blue Apron (APRN). Expected price $15-$17…Opened at $10, sold off to $7.50


Tech Versus the Market

Tech just overcame the defensive consumer staples sector on a 5 year basis at the end of 2016.  In 1999 and 2000, money stopped flowing to any sector but tech. Every other asset class was undervalued except technology stocks: Bonds, housing, value stocks, dividend stocks, international equities etc.  Today, you could make a sound argument that defensive areas of market are the most overvalued–U.S bonds, dividend payers and low volatility stocks are trading at record valuations.

On a 5-Year basis….Tech just exceeded the performance of consumer staples this year.

XLP Consumer Staples ETF vs. XLK Technology Sector ETF-Tech just took the lead at the end of 2016.

What did tech look like in 1999 vs. consumer staples? Try a 5x valuation. 

Tech vs. Consumer Staples 1999        

Tech: End of the Bubble or Start of the Secular Recovery?

Tech bubble predictions begin with the FANG stocks (Facebook, Amazon, Netflix and Google) which are driving a large part of the sector’s outperformance. But, they are also growing revenues and (in some cases) earnings at double digit rates.

Could FANG stocks suffer a 20-percent correction at any moment? Of course, I would expect tech to correct more than broader market would in the next sell off. But, a short-term correction of an overheated sector is certainly not the same as a secular technology bear market. What does the big picture look like for tech today compared to conditions that lead up to the 1999 bubble?

1984-2000 Nasdaq +1800% versus 2000-2017 +24%

Picture 1 (1983-2000).  Picture 2 (2000-2017).

Tech is just Breaking Out of a 20 Year Consolidation.


Most of my readers have heard me repeat that the crisis of 2008 left the biggest investing hangover in the U.S. since the crash of 1929. Plus, it created a new cottage industry of bubble spotters including fresh MBAs who want to devote their time to finding the next crash instead of recommending the next AAPL. Behavioral finance will tell you that both paths are equally difficult to follow, if not impossible. So as investors, we are better off staying focused on a disciplined strategy.

Politics change, management teams change and taxes change, but human nature never changes. In my lifetime, the U.S. will see another 1999-type bubble, but those conditions do not exist in today’s tech market. Expect a correction in technology stocks especially FANG names, but put that in perspective of the NASDAQ’s 78 percent drop from peak to bottom in 2000.

You might be interested to know that in 88 out of the last 89 years, we have seen a market correction of at least 5 percent, and in 67 out of the past 89 years, we have experienced a 10 percent correction or more. I don’t lose sleep worrying about the next pullback. Only one thing scares me right now about the stock market–everyone I know is bearish or waiting for a pullback. On another note, until Vanguard stops buying $3 billion per day of FANG stocks, I’m don’t see how they will go down in value.

So, grab a cocktail at the beach and stick with Don Ho–leave the bubble pushers in the hot city.


So here’s to the golden moon
And here’s to the silver sea
And mostly here’s a toast
To you and me

Don Ho Tiny Bubbles