The Great Boom Behind

I’ve heard from a number of advisors who are asking themselves a simple question: are we living in a market bubble?  What they’re really asking is: Am I the only person who sees this?  Are things really as crazy as they seem to me?

And the followup question, sometimes stated, sometimes not, is: My conservative portfolio has been underperforming the market for years.  Am I hurting my clients by not going all-in on the market boom?

And, of course, sometimes crypto questions creep into this internal dialogue.  Any one of us could have bought bitcoins for pennies ten years ago.  People who did are sitting on millions now.  Are we missing out on similar opportunities today?

I remember when the profession went through a period exactly like this in the late 1990s, when the markets were experiencing a bull market that seemingly would never end.  Stock valuations were led by tech companies, many of them not around anymore, some of which were valued not by profits or revenues, but by ‘eyeballs’—that is, the number of people who were paying attention to them.  The headlines were calling for more, ever more stock market runup, and a lot of pundits were telling us that we had entered a new era in investing.  A credulous best-selling book calculated that the Dow would be fairly valued at 36,000 (it actually peaked at 11,750.28 and two years later reached a low of 7,286.27), and some asset managers chided mainstream advisors that they were too stodgy to recognize the massive return opportunities still ahead as the tech sector set about transforming the global economy.  Follow the eyeballs.

At the time, the only skeptical voices I heard as a journalist were coming from financial planners, and I wondered how that could be.  The answer, it turns out, is that the planning profession had spent the past decade in a fruitless search for an edge on the indices.  For many years, there had been sessions at the major conferences on how this or that professional investor used clever Morningstar screens to identify mutual funds that would subsequently beat the market, and this quixotic search for that ever-elusive edge went on and on until most advisors began to realize that they were spending a lot of fruitless time costing their clients money in the form of below-index returns. 

By the terminal days of the 1990s bull market, in the years before the Tech Wreck, financial planners as a group had learned humility the hard way.  Most of the people I talked to back then were extremely wary of the soaring market valuations, and were investing in what they knew and understood on behalf of their clients. 

Those were, in retrospect, very tough days for the profession.  The opportunistic money managers were luring away clients by promising to go all-in on the tech sector right before it was due to experience the inevitable crash.  They had a great marketing line: Your financial planner has been underperforming the market for years.  Isn’t it time you dumped that loser? It was never harder to hold onto clients than it was in those years.

Today, with the total crypto market cap rising above $1 trillion (over $2 trillion earlier this year), and the market indices climbing up to valuations we experienced back in the late 1990s, those cynically opportunistic marketing pitches sound just as alluring as they did back in the day.  Holding onto clients when you’re investing cautiously is once again a vexing chore.  You can argue that there is absolutely no tangible value underlying Bitcoin or Ethereum or any of the dozens of other “coins” manufactured out of thin air, and you can point out that markets always return to something close to their mean historical valuations (This time is NEVER different…), but there will always be a subset of investors who lose patience at exactly the wrong time.

I am not giving you advice here; you know enough to follow your own experience and wisdom without any input from me.  Instead, I’m offering sympathy.  People look back on the 1990s stock market boom and think those must have been great times for professional investors.  My memory is that they weren’t then and they really are not now.  It’s nice that clients are getting wealthier.  But experience tells us that the tail end of a bull market is always painful to the prudent investment manager—and preparing for that tail end is extremely difficult, because it is impossible to see when the jaws will snap, and it hurts to give up returns in the meantime. 

If clients are telling you that you’re too stodgy and out of touch, remember that the planning profession has, in the past, been the lone voice of reason during manias.  I expect that to be true when we look back on this one some years down the road.

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