‘As they talked, the client told Ms. Sun he expected to make 20% a year in the stock market.” The Wall Street Journal, “Advisers Act to Cool Expectations” 5/10/2015
Many investors have become irrational in their investment expectations due to the market’s recent bull run. The S&P 500 has averaged over a 20% yearly gain since 2012, fueling this increase in risk-taking mode among some investors. This is a classic example of the recency effect: an expectation that whatever has happened in the past will continue. While the market has soared recently, the average return lies somewhere between 8-10%, annually. Expecting a 20% annual return every year is akin to believing your car will get 60 M.P.G. while the sticker says 30. Some high-flying technology stocks have done much better than this. The rally may continue for a while but, like anything else that cannot go on forever, it will end. Now would be a good time to revisit the decade of the 1990’s: a time when companies were valued by clicks and Warren Buffet was termed a dinosaur. Here are 10 reminders for “That Guy” on what can happen when you start talking smack. Many invested in these companies with the same distorted view of average market returns. Don’t be “That Guy”…
1. Think Tools AG– Valued at $2.5 Billion (Swiss francs) despite no prospect of having a worthwhile product. It collapsed.
2.Books-a-Million – Price rocketed 100% in a week when it announced its website was updated. Its share price went from $38.94 to $3.00 a couple of years later.
3. Startups.com– This was labeled as the “Ultimate dot-com startup”. It went bankrupt in 2002.
4.Broadcast.com– Mark Cuban’s greatest deal, sold to Yahoo for $5.9 billion on stock. The site is no longer functioning.
5. InfoSpace– In May 2000, this stock sold for $1,305 a share. A buyer at this level could have sold these shares in 2001 for $22.
6. Boo.com– This company spent $188 million in 6 months to try and create a global on-line fashion store. It went bankrupt in May 2000.
7. e.Digital Corporation– It was also called Norris Communications but changed its name to take advantage of dot.com mania. It once traded as high as $24.50 in 2000, by 2013 it was priced at $0.12.
8.Tiscali – Italian Telecom that went from 46 Euros to 1,1197 in 4 months during 1999. It fell back to 40 and eventually traded at 0.2 Euros.
9. Webvan– An online grocer that operated on a “credit and delivery” system. It went bankrupt in 2001.
10. WorldCom– A new age telecom provider which went from being an internet darling to bankruptcy in 2002. Its founder, Bernard Ebbers, was sent to federal prison on fraud and conspiracy charges.
One investor with expectations of 20% returns admits, “They (advisors) don’t think I’m completely insane, but I can also tell the older, or more logic based, financial advisers kind of look at me funny.” He would be better off if they acted like Loretta Castorini from Moonstruck and slapped him upside his head while giving him this timeless advice: “Snap out of it!!”