By my count, the middle of next week marks the 2,000th day of the new millennium, or at least the new century, but let us not get bogged down again in that debate. I'm sure other media outlets are working overtime and devoting massive resources to properly commemorate this auspicious occasion -- (Time's Person of the First 2,000 Days issue, USA Channel's Top 2,000 Law & Order Episodes From the First 2,000 Days, VH-1's 100 Most Awesomely Bad Scandals of the First 2,000 Days, etc.).
Here at The Motley Fool, I'm the only one researching it, so you'll forgive me if I need to mentally reset my clock and start with an anecdote to try to remember what I was doing and what was going on in the market just as the 21st century was dawning.
Flashback: late December 1999
So, while my wife is getting ready to deliver our first child by caesarean section, her anesthetist tells me that it is his and my job to keep her distracted with conversation unrelated to anything so seemingly relevant as, say, what all the other doctors in the room might be working on. He seems like a pretty nice guy, and he's done this a few times, so I take it that he knows what he's talking about and go with it.
He asks me what I do for a living and I tell him that I work at The Motley Fool. He takes that as an invitation to talk stocks, and since all of this does seem to be successful at distracting the patient from anything that might cause her concern, I play along.
The anesthetist wants to know what stocks I like at this point. I'm really not sure what his level of sophistication is, or how much I want to potentially influence somebody given that I'm devoting approximately 0.004% of my concentration to this discussion. But I toss out Berkshire Hathaway as an attractive company. His response: "I really like JDS Uniphase
Except he doesn't actually say the "open parenthesis Nasdaq colon JDSU closed parenthesis" part. That's just a visual convention we use online.
My response to this is that, despite having read many articles about JDS Uniphase and knowing more than one person who was happy owning it, I really don't feel I understand its business or its competitive advantages enough to think about investing in it. If he's looking for a tech stock, I think Apple
Flash-forward: 2,000ish days later
OK, sign of the times and everything. You're probably pretty well aware that in December 1999 there was a little bit of excessive enthusiasm in technology companies whose products few understood. JDS Uniphase isn't the only example, and our anesthesiologist, who helped successfully deliver my daughter and each of her two younger siblings since, wasn't the only one who didn't accurately gauge his understanding of the company.
Jeremy Siegel, in his outstanding new book, The Future for Investors, makes the point that when the largest-capitalized company in the market makes a product that few people can name or understand (Cisco in 2000 is Siegel's example), that's probably one of his signs of a market peak. And Siegel wrote some columns about that call at the relevant time, so he's got a certain amount of credibility on this issue.
With the benefit of hindsight, we can dig up the list of high-profile "tech" companies whose stocks would enjoy an early start to the millennium. Let's see, there's eBay
You don't always need hindsight to make the right call
But was any hindsight necessary to make a decent call? Let's see how large cap vs. small cap and growth vs. value have done to start the millennium. Take 2000-2004, for starters:
Fama and French; Moneychimp.com
This is a pretty strong argument that small-cap value had a nice five-year run to start the millennium, and large-cap growth companies, for which JDS Uniphase was a poster boy, were not poised to serve you so well. Is that an aberration, a change from what we should have expected in 1999? Let's look at the longer time horizon leading up to Y2K.
Fama and French; Moneychimp.com
So, although it is typically a good time to invest in small-cap value, at that particular point it was a great time to invest in small-cap value.
Thinking back on that day fateful day, I was, of course, giving virtually no thought to the conversation. Why should I have? I had more important things going on nearby, and I suppose you get what you pay for. (Except when you take a free trial of Hidden Gems. During the free trial period at the very least, you will get more than what you are paying for.)
But if I had -- counter to every survival instinct I possessed to retain a sound marriage -- devoted a little bit of attention to the good doctor, it should have been to grab his scrubs and say, "New millennium and all, but you need to calm down, man! You need to think in terms that are a lot more 20th, no, 19th, I don't know, maybe even 18th century. Incredibly boring stuff. You know terms like 'as exciting as watching the grass grow' or 'as exciting as watching paint dry'? That's where you need to focus for your best investment ideas -- not on technologies you have no hope of predicting."
I mean, we all understand grass. And paint. My now 5 1/2-year-old daughter can understand it, and that might not be a bad threshold to consider when judging a company's potential on a risk-adjusted basis. But that's another article.
Let's throw, I don't know, salt into the mix and see what kind of returns we can come up with during this most incredibly revolutionary of millennia:
|Company||12/31/99 Price||06/14/2005 Price||Return|
|JDS Uniphase (Optical Networking)||$80.65||$1.56||-98%|
*Compass Minerals started trading on Dec. 12, 2003.
Maybe people weren't expecting the new millennium to look so, so, so much like the past ones at that point in time. Investors weren't fully appreciating that people would still maintain, water, and seed their lawns, paint their houses, and salt their sidewalks when it snowed. I suppose they would have acknowledged those things if asked, but they might have started thinking, "Yes, yes. But who is going to be selling salt, latex coating, and grass seed on the Internet?" And that, as it brutally turned out, would have been the wrong question to ask.
In saying that, and using these companies, I'm certainly not claiming that a sample of five companies provides representative returns that you would expect from such industries over all periods of time. But you can show that seemingly unbelievably dull companies and industries provide superior returns to "no-brainer exciting breakthrough technology" companies with a thousand other examples. (Did you know that stocks from the dying and doomed railroad sector have outperformed the market since the S&P's creation in 1957?) You can look at the eye-opening returns of such things as glass and cans ,or you can read Siegel's book, or you can just start to keep track of some examples yourself.
In the Hidden Gems service, we're busy cornering the market on the equally exciting door, oven, and paper markets, thinking that the returns in the future for small caps, particularly boring small caps, will match their historical returns. It's been working very well so far (the newsletter's picks are substantially ahead of the market), but with the proper research you can find plenty of similar companies on your own as well.
Bill Barker owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.