On October 1, 1999, almost 25 years ago, an intrepid little band of financial advisors and staff made their way from Palo Alto to Redwood Shores to start life as a new firm, which came to be Hewins Financial Advisors. We ultimately relaunched in 2018 as Team Hewins, independent once more.
I take you on this little stroll down memory lane for a reason. At that moment in time we were in the late stage of what came to be called the dot.com bubble. Cisco famously soared to a price/earnings ratio of 100, only to tumble precipitously, never to regain its high price (from March 2000) to this day.1
Speaking from my personal perspective, I do see some parallels to that era in the current market. As many point out, there are enormous differences between these two periods, especially the size and profitability of today’s tech giants. In the late 1990’s a lot of smaller companies with no profits got huge valuations based on sales, clicks, eyeballs, and other non-traditional factors. Profits did not matter anymore, until they did.
So, is this the same thing again?
No. We now have three companies with total market capitalization above $3 trillion – Microsoft, Apple and Nvidia. Which of these is the world’s largest company varies day to day. These companies have strong profits and balance sheets — they are not castles in the sand, based on hopes and dreams. They are quite real, and though they are expensive they are not ridiculous.
So what is the parallel?
In the late 1990’s the internet took off. Any company seen as an internet company, or with a “.com” in its name, rocketed skyward, untethered to reality as we have known it in the world of finance. The point is that a transformational technology was changing everything, and investors piled into whatever seemed likely to benefit. As it turns out, it is really hard to tell how such a transformational technology will affect the world, the markets, and individual companies. Really hard.
“It’s tough to make predictions, especially about the future.”
― Yogi Berra
I think we have used this bit of profound wisdom before. We can see that something new is happening and will have big impacts, but that does not translate into a winning stock portfolio. As we marvel at the huge run Nvidia has had, it begs the question – now that it seems so obvious, how come everyone did not see this and act on it several years ago? The obvious answer: it was not clear ahead of time, only in hindsight. As always.
Unexpected large consequences
Telecom stocks were huge beneficiaries of the dot.com bubble but collapsed after 2000. Tons of excess capacity were put in place, including a lot of overseas cabling. Those companies turned out to be poor investments, but an unexpected beneficiary was India! Suddenly all this excess capacity enabled communications between the western developed world and India to become cheap and easy, facilitating tons of outsourcing business and other communications benefits to India. Changed the world, but not what we expected.
So who will be the beneficiaries of AI?
As this Dimensional Fund Advisors article explains, a broad array of companies are likely to benefit. Obviously Nvidia has benefited hugely, but so have several other companies you might have missed, companies supporting the datacenters needed to support AI efforts, for example. AI will affect the world of business in many ways, and the benefits are likely to be large, varied and unpredictable.
The point is that chasing specific companies hoping to capture the magic has been tried before with, shall we say, “mixed results.” Having a broadly diversified portfolio turned out to be a big winner in the so-called “Lost Decade,” the ten years following the collapse of the dot.com stocks in 2000 when the S&P 500 had a negative return for a full decade! We are confident many of the stocks in your broadly-diversified portfolio will do well going forward and will benefit from AI. We just don’t know how to identify them all in advance. Of course.
1. Jovène, J. (2023) Nvidia 2023 vs. Cisco 1999: Will history repeat?, Morningstar, Inc. Available
at: https://www.morningstar.com/stocks/nvidia-2023-vs-cisco-1999-will-history-repeat.
Accessed 28 Jun. 2024.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Certain information contained herein constitutes forward-looking statements. Team Hewins does not guarantee the achievement of long-term goals in the portfolio review process. Past performance is no guarantee of future results, and a diversified portfolio does not guarantee a positive outcome. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future.