“The four most dangerous words in investing are, ‘It’s different this time’” – Sir John Templeton
Sir Templeton’s famous axiom is typically used to drive home a warning to investors to not get complacent with ascendant equity returns. Behavioral biases being what they are, strong recent returns from an investment often lead us to believe that they will continue on ad infinitum and ignore the reality that investing often comes with risk and volatility. Complacency with any investing plan can be problematic and is one of the reasons we constantly monitor the economy, market valuations, and corporate profitability, among many other factors, as we tactically manage our client portfolios.
However, those who use Templeton’s quote to perpetually warn against looming bear markets ignore the fact that it is always different this time around. What do we mean by that? Recently, the specter of a second tech bubble has been coming to the forefront of some financial publications. There have been some concerns that the recent strong performance from the FAANG stocks – Facebook, Apple, Amazon, Netflix, and Google – is a repeat of the late 90’s tech bubble. Indeed we have cautioned about the momentum in tech sector and its prevalence across factor and market cap weighted strategies. However, it really is different this time when it comes to performance and valuations in tech compared to the 90’s bubble. The following graphic from Oppenheimer Funds illustrates the discrepancy in valuations between the late 90’s and present, as well as the difference in returns.
The average price to sales ratio for major tech investments in the late 90’s was sixteen times compared to just five times at present. Returns were also significantly more euphoric then as well, with returns for large tech stocks clocking in at 389%, five years into the tech bubble, compared to 138% for the FAANG stocks, now.
This does not mean that we plan to chase returns in the best-performing tech stocks. They may be due for underperformance or continue to post stellar returns. Trying to predict short-term returns can be a fool’s errand and that is why we diversify our portfolios across sectors, market caps, countries, and asset classes. We noted last month that international and emerging market equities have been out of favor during this bull market, while tech has shined. We continue to think that global equities, among other areas such as energy pipelines and small cap value, are trading at attractive discounts with favorable long-term return prospects. The key takeaway is that a well-diversified investor is always going to have positions in their portfolio that they love (like tech right now) and that they cast a skeptical eye towards (like energy right now). Sir Templeton was right to warn about thinking the good times will last forever, but we don’t see it as time for undue concern yet. While history rarely repeats, it often rhymes and as a result, we continue to rotate into undervalued asset classes in client portfolios and focus on long-term real return while participating in sensible growth opportunities.
Investment Advisory services offered by Independent Financial Partners (IFP), a Registered Investment Advisor. Wharton Hill and IFP are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.