I’m going to vote on stock and crypto bubbles, so here are a few things you might want to know about me …
I agree with many market watchers who believe we are nearing the peak of one of the biggest speculative financial bubbles in history.
So I will write about it.
But before I do, I will remind you of some things you might want to know about me.
First, I have some experience with bubbles – as a participant, observer, and student of history. Second, my bubble experience includes an event that even now, decades later, shames me when I think about it.
In 2003, in the aftermath of the dot-com bubble of the late 1990s, regulators investigated how research analysts and investment bankers worked together on IPOs and other financing during the boom. A dozen brokerage firms and stock analysts (and myself) have been charged with civil securities fraud. I had to pay a huge fine and was kicked out of the securities industry.
Along with my work as an analyst, these events were widely publicized at the time, and I wrote a lot about them and my other bubble experiences. But here’s a summary.
From 1994 to 2001, I was an investment banker and internet equity analyst at Prudential, Oppenheimer and Merrill Lynch. In 2000, I was ranked # 1 Internet Analyst by Institutional Investor, The Wall Street Journal, and others. I covered Amazon, Yahoo, AOL and other stars of the day.
Like many others, I was, in hindsight, overly optimistic about the long-term prospects for many of these early internet companies – and have felt silly about it ever since. But my opinions were more nuanced than they were later. In the hope that my thinking will help provide some context for those navigating the current bubble, I’ll share some of it here.
In a wonderful treatise titled “A Brief History of Financial Euphoria,” historian John Kenneth Galbraith observes that bubble speculators generally fall into one of two camps. The first camp believes that the wild price appreciation is not a temporary “bubble” but a permanent change in the way certain assets are valued (eg “It’s different this time.”). The second camp believes that it is a bubble, but that he will be able to take before the crash.
At the end of the 90s, I was between these two camps.
I thought the internet was a deep new technology that would cause great upheaval in the economy and create a lot of amazing investment opportunities. I also believed – and warned repeatedly – that “what looks like a bubble probably is” and that many then booming dot-coms would fail and disappear.
Given these risks, I recommended that even aggressive investors invest only a small percentage of their portfolios in internet stocks and hold them for the long term. I have rated almost all of the stocks I have covered “high risk”. And I put my money where I was: I bought and owned Amazon, AOL, Yahoo, and other tech stocks. So when the bubble burst, I too was devastated.
From 2000 to 2002, the tech part of my portfolio fell by around 90%. A lot of my assets never recovered. Fortunately, one of my stocks, Amazon, recovered – and then some. As Jeff Bezos noted, when you get the big picture, you can go a lot wrong and still be OK.
In his book, Galbraith observes that all bubbles end the same – with the public gutting of those “previously most admired for their imaginations and financial acumen” (eg, I.). I have only read the Galbraith’s book until after the crash. But it gave me an idea of what might happen.
Sure enough, in 2002, then New York Attorney General Eliot Spitzer alleged that the relationship between the research and banking divisions of brokerage firms created a conflict of interest that made our research overly optimistic. I had no problem with Spitzer’s desire to improve the industry. But I believed it was possible for analysts to do their jobs with integrity. I testified that I never wrote a word in a research report that I did not believe. Sadly, Spitzer and the SEC went ahead and filed complaints against a dozen companies and analysts (and me) and restructured the industry.
When these charges were laid I became an international disgrace. I was afraid I would never work again. Fortunately, when trying to figure out what to do next, I found that a lot of people still believe in me. I will be eternally grateful for it.
A gratifying footnote to my regulatory experience came in 2009. (And, no, I’m not referring to the prostitution scandal that forced Spitzer to step down as governor of New York.) The roughly $ 450 million in fines that myself and other companies and paid analysts went to set up a fund to compensate those who thought they had been misled by our research. There were so few complaints about my research that my share of the fund mostly stayed there, earning interest. In the end, the fund administrators just sent it to the treasury.
So that’s part of my story with financial bubbles. And now let’s move on to some things I’ve learned! …