20240311 The Madness of Crowds

The Madness of Crowds

In 1852, Scottish journalist Charles Mackay wrote Popular Delusions and the Madness of Crowds. In his book, Mackay chronicled financial manias through history, including the 17th-century Dutch Tulip Mania bubble. He showed the consistency of human behavior when it comes to greed and fortune.

Is another bubble brewing in today’s artificial intelligence (AI) sector? NVIDIA Corporation just surpassed a $2 trillion market capitalization and sits only behind Microsoft and Apple in terms of valuation. The stock price for NVIDIA has increased 66% so far this year. Last year, it surged 239%. 

Today’s AIboom reminds me of the “Dot-Com” bubble in the 1995-2000 period when anything with a name ending in “.com” minted money regardless of its profitability. This period was characterized by market overconfidence and pure speculation. Some investors loved “flipping” IPO stocks through their stockbrokers. VA Linux went public in December 1999 and appreciated by around 700% during its first day of trading alone. A year later, it was worth half its original IPO price.

In early 1995, Fed Chairman Alan Greenspan described the stock market as showing “irrational exuberance.” He was trying to temperthe market, but the Nasdaq continued to increase in value through 2000 to a peak of 5,058. It took until late 2016 for the Nasdaq to exceed that level. Cisco went public in 1990 with a market cap of $224 million. Its value peaked in 2000 near $500 billion. Today, Cisco’s market capitalization is $193 billion. It even took Microsoft 14 years to exceed its peak 2000 valuation. 

An infamous episode of the Dot-Com era was the AOL-Time Warner merger – the largest in American business history at the time. AOL paid $350 billion in stock for Time Warner. AOL CEO Stephen Case said, “The internet had begun to create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding, and creative expression.” Today, we know that the internet has profoundly changed our lives, but Time Warner’s former shareholders were not happy when the value of the combined company fell to about one-seventh of its worth on the day of the merger.

In these boom time periods, I am reminded of Warren Buffet’s six investing principles.

  1. The most important quality for an investor is temperament, not intellect. 
  2. Focus on quality investments – “Buy great companies at a fair price rather than good investments at a cheap price.”
  3. Look for undervalued, out-of-favor companies.
  4. Diversify your portfolio.
  5. Be patient – if you overpay, you may need to wait a long time to turn a profit.
  6. Avoid market speculation.

As you might know, the Japanese Nikkei Index has only just surpassed its 1989 peak. Back then, the Japanese were buying up Hawaiian land and even the Rockefeller Center. Japan was featured on the cover of Business Week as the “Rising Sun,” destined to take over the world. How wrong the market can be! 

Gary B. Martin