Countries around the world were hit hard by the financial meltdown a decade ago.
One of the worst affected was Greece.
You likely heard about their debt problems.
During that time, yields on some Greek bonds reached close to 35%.
That meant, if Greece did manage to repay their debt, investors would make 35% on their money.
And these were government bonds…
I’d bet you wouldn’t find any government bonds trading at such low prices today.
Overnight, investors piled into US bonds, pushing prices up and yields down. Buy a 10-year US government bond now, and you’ll receive just 2.9% on your money.
Investors seem worried about the risk of stocks globally, which is also why stocks in the US came down more than 3% overnight.
Even in places like Argentina, with hyperinflation and a terrible economy, bonds are yielding at 20%.
So, a yield of 35% tells you just how dire things were at the time.
As we know now, a Greek default wasn’t something the European Union (EU) or the International Monetary Fund (IMF) was going to let happen.
Both gave Greece billions to repay their debt.
And they continue to give Greece money.
In fact, the EU funds a whole bunch of countries within the Union border. Many of them, I’d argue, cannot afford to pay the debt they have now, let alone more debt on top of that.
What happened to Greece is a wonderful example of what is wrong with the world. Not just in politics or in finance, but all over.
The world is consumed by short-termism. And tech investors are some of the worse affected…
The world is consumed by short-termism
To a group of soon to be Harvard graduates, Seth Klarman got up on stage to talk about hard choices.
A Harvard graduate himself, and many successful years of investing billions for clients, Klarman started with what he knows best: capitalism.
‘I suspect there’s a great deal that most of us can agree on about capitalism. The free enterprise system, of which HBS is an essential part, has lifted billions of people around the world out of poverty.
‘It provides the backdrop for unleashing boundless human potential. It has made the US an economic powerhouse. It has played a major role in capital being allocated to the most productive uses.
‘Free enterprise has led to the creation of a staggering number of jobs that support families and the invention of a wide range of innovative and affordable products that make people’s lives easier, safer, and more enjoyable.
‘In many capitalist economies in 2018, and especially in our own, innovation is unending, and its pace may even be accelerating. The creative destruction of capitalism gives it a remarkable advantage over other systems. You sometimes have to be willing and able to tear down in order to build up. The old and proven and venerable must sometimes give way to the new and innovative and transformational.’
But it’s not a perfect system, Klarman added:
‘Everyone knows the famous movie line, when Gordon Gekko told us that “greed is good.” Do any of us really think that greed alone is what motivates a capitalist to strive, invest, and dream, or that it always leads to the best possible outcome?
‘If greed is good, is greedier better? If I were greedier, if I paid my people less and demanded more from them, if I raised the fees I charge and cut my costs, would that make me and my company better off? Certainly not.
‘…One of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision-making, and in our politics.’
I guess you could take the EU’s funding of Greece as a political example.
And businesses are no better. Managers tend to focus on quarterly earnings and stock prices. Their pay is tied to it, after all.
‘Isn’t it clear that Wall Street goes through mood swings, that what might float the market’s boat this week might sink it the next? And might not an artificially inflated stock price tempt management into acutely short-term-oriented and potentially, even value-destructive practices in order to maintain it or inflate it further?’ Klarman asks.
According to a study published earlier this year, about 80% of CFOs admit to sacrificing economic value to meet quarterly earnings expectations.
And of course, investors join in on the short-term thinking. The irrational tech investor is a great example.
Investors are short-sighted with tech stocks
They hype industry growth and addressable markets, using them to justify high valuations.
But ask anyone buying Netflix right now if buying a dollar of earnings for $100 is smart. I’ll bet the majority says no.
And yet they still go out and buy Netflix.
One reason for this, I think, is because many investors don’t think about holding a stock for years. I mean, how could they?
Time will eventually sort the good from the bad investments. And almost all of the time, expensive stocks turn into bad investments.
What I think most investors are doing are chasing a rush. They just saw Netflix rise X%. And they want to jump on that momentum.
Same goes for Amazon and various other tech names out there.
I think Klarman hits the nail on the head when he says:
‘All of us can get carried away with a seemingly good idea taken to excess.’
So yes, Amazon is a great business. Yes, cloud computing will continue growing in the next few years. Yes, retail is a massive addressable market, and there’s more to move over to e-commerce.
But this convincing analysis encourages investors to pay silly prices.
Right now, a lot of tech stocks still look silly. Investors continue to buy the tech dip, though.
The NASDAQ is now up 9% from its low this year.
Investors now shuffle back into the most crowded trade (long tech stocks).
But you could do something different. Rather than following the masses into the big names, you could look for more obscure companies. The cheaper ones.
And if you do find something that looks like a gem, you could hold it and see where it takes you. Who knows, in a few years’ time, this potential gem could really pay off.
Your thrifty friend,
Editor, Money Morning
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