Once upon a time, there was a great oracle named Rimpy. Rimpy warned anyone and everyone that a great Crash was coming. He constantly preached on the dangers of owning stocks. He was resolute in his belief that a giant bubble had formed, and that soon it would pop and destroy the wealth of millions.
Rimpy was right. Sort of.
The BubblePort
Rimpy is Mike Renshaw, a friend of mine who has been a valuable member of the Fool Community since 1997. His first post was a well-reasoned treatise on the dangers of investing in Amazon.com (NASDAQ:AMZN). Under the screen name Rimpinths, he continued for months to lay out reasons to avoid not just Amazon, but the entire market as well. His arguments were always well-researched, lucid, and interesting to read.
Of course, there weren't many willing to listen to him. When people are making money hand over fist in a roaring bull market, a messenger bearing doom is not well received. Through it all, though, Rimpy mostly took the taunts and ridicule in stride.
He was so firm in his beliefs that he created the BubblePort in November 1998. "I think the biggest mistake new era investors are making is that they buy brand name stocks in high growth industries regardless of the price of the stock and without respect to the underlying fundamentals of the company," he wrote. "Of course, it goes a lot deeper than that, but that's a simple explanation of what is driving this bubble."
He plucked the names of eight well-known stocks from high-growth industries for his portfolio: Dell (NASDAQ:DELL), Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO), Lucent (NYSE:LU), America Online (NASDAQ:TWX), Yahoo! (NASDAQ:YHOO), and Amazon.com. This "index" was given an arbitrary value of $100,000.
Rimpy said he believed all of these stocks carried "ridiculous valuations" and that the BubblePort would drop below $50,000 within a year. "I won't go as far as saying that this is the top for this index, but I do believe that this will be its last major upswing. Once it stalls, it'll be going downhill."
Thus, Nov. 9, 1999, became known as the "Day of Reckoning," the date by which Rimpy predicted the BubblePort would be worth less than half its original value. Of course, stocks didn't begin crumbling until 2000, and thus Rimpy took much flak on that date. "I can't let the Day of Reckoning pass without acknowledging that the BubblePort is at $226,302 on the day I said it would be worth $50,000. The BubblePort is worth four and a half times what I thought it would be on this date."
True to character, he remained undaunted in his beliefs. "Although some may say that a 126% gain over the past year proves me unequivocally wrong, I'd argue the paradoxical notion that this absurd gain proves me right. 126% in a year!!! How could such gains be possible if this was not a bubble?"
Pop!
Over the next few months, the value of the port shot up past $300,000... and then the bottom fell out of the market. By the beginning of 2001, the index was back down to its original worth of $100,000, and it has drifted even lower after that. I'm not quite sure if it ever hit the magical $50,000 mark, because Rimpy stopped updating his Web page in July 2002. Whether it finally halved or not is rather unimportant; sometime in 2003 it came close. Sure, it was more than two years after he thought it would happen, but he was close enough to be "right."
As many readers probably know, Rimpy became TMFRimpy in late 2000, joining The Motley Fool as a software developer. Though the bubble had already burst by then, Mike still believed most stocks were overvalued, and took up the bear positions for several of our Dueling Fools features (such as this one on JDS Uniphase (NASDAQ:JDSU)).
Unfortunately, things got even tougher for the Fool, and Mike was among many talented people laid off several months later.
Aftermath
It's now been a bit more than five years since the BubblePort's inception. Here's where things currently stand:
| Company | 12/17/2003 | 11/9/1998 | Total return |
|---|---|---|---|
| Amazon | $49.50 | $21.15 | 134% |
| AOL | $17.53 | $18.09 | -3% |
| Cisco | $23.77 | $16.75 | 42% |
| Dell | $32.65 | $34.50 | -5% |
| Intel | $30.26 | $23.62 | 28% |
| Lucent | $2.90 | $33.51 | -91% |
| Microsoft | $27.06 | $27.43 | -1% |
| Yahoo! | $40.70 | $41.19 | -1% |
| Total | $224.37 | $216.24 | 4% |
| S&P 500 | 1075.13 | 1130.20 | -5% |
| Nasdaq | 1924.29 | 1861.05 | 3% |
| Dow Industrials | 10129.56 | 8898.00 | 14% |
Amazingly, and perhaps fittingly, the port and the major indexes are near just about where they were five years ago. Through the few final year of the bubble, through one of the worst bear markets this country has ever seen, and through a 2003 that finally killed the bear, Rimpy's index stands 4% ahead of its starting mark.
The BubblePort has been educational for me in a couple of ways. For starters, it was my focal point for one of the most incredible periods in stock market history. Thanks to Rimpy, I was able to experience the entire boom and bust with his port as an anchor. The discussion it generated and the lessons it taught would make for a fascinating book.
Also, five years later, it reinforces for me the extreme difficulties of playing the market-timing game. With all the pain that the crash and two-year bear market caused, an investor who owned and stayed with the BubblePort stocks would actually be in the black today. Yes, the major indexes are still off their all-time highs. But even Rimpy, who was absolutely right in predicting a catastrophic market collapse, and who was far more prescient than the Dow 36,000 folks, could not time it right. In addition, he predicted stocks would remain depressed for many years, and his continued bearishness completely missed the strong 2003 recovery.
I don't know what will happen in the coming months. Perhaps stocks will crash again, and it won't matter that my friend missed this latest bull run. Perhaps the market will continue forward for a long time. Whatever happens, though, I continue to believe that, with a long enough time frame, staying invested in the market is the best way to build wealth.
Parting thoughts
I'll leave the final words to Rimpy himself. I asked him last week if he still thought he was "right," and he told me, "Definitely, for four reasons. One, the Nasdaq lost 80% from its peak, the worst since 1929. Two, the economy has been and still is in its worst shape since the 1930s. Three, the Naz is still years from setting a new high. Finally, the five-year total return on the BubblePort is 4%, worse than a savings account."
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Rex Moore remained invested through it all. The only BubblePort stock he owns is Microsoft, and no others mentioned in this column. His holdings are listed on hisprofile page, as dictated by the Fool'sdisclosure policy.
