“Y’all Must’ve Forgot”
During his prime, legendary boxer Roy Jones Jr. was one of the best fighters that many fans had ever seen. However, Jones didn’t seem to get as much respect as he thought he deserved. So, in 2001, he released a rap song that listed his accomplishments and reminded fans about just how good he was. The song was titled “Y’all Must’ve Forgot.” Roy was a much better fighter than he was a rapper. The song was horrendous.
Looking back, investors in the mid- to late 1990s remind me of boxing fans in 2001, when Roy released his epic tribute to himself. Both groups seemed to have forgotten how good they had it—boxing fans no longer appreciated the immense skills of Jones, while investors grew tired and impatient with the 10.9% average annual returns of the Standard & Poor’s (S&P) 500 (including dividends), since 1961. After decades of investing sensibly, in companies that were good businesses that often returned money to shareholders in the form of dividends, many investors became speculators, swept up in the dot-com mania.
I’m not blaming anyone or wagging my finger. I was right there with them. During the high-flying dot-com days, I was trading in and out of Internet stocks too. My first “ten bagger” (a stock that goes up ten times the original investment) was Polycom (Nasdaq: PLCM). I bought it at $4 and sold some at $50 (I sold up and down along the way).
However, like many dot-com speculators, I got caught holding the bag once or twice as well. I probably still have my Quokka stock certificate somewhere in my files. Never heard of Quokka? Exactly. The company went bankrupt in 2002.
With stocks going up 10, 20, 30 points or more a day, it was hard not to get swept up in hysteria.
And who wanted to think about stocks that paid 4% dividends when you could make 4% in about five minutes in shares of Oracle (Nasdaq: ORCL) or Ariba (Nasdaq: ARBA)?
Did it really make sense to invest in Johnson & Johnson (NYSE: JNJ) at that time rather than eToys? After all, eToys was going to be the next “category killer,” according to BancBoston Robertson Stephens in 1999. Interesting to note that eToys was out of business 18 months later and BancBoston Robertson Stephens went under about a year after that.
If, in late 1998, you invested in Johnson & Johnson, a boring stock with a dividend yield of about 1.7% at that time, and reinvested the dividends, in late 2011, you’d have made about 8.6% per year on your money. A $3,000 investment would have nearly tripled.
Johnson & Johnson is a real business, with real products and revenue. It is not as exciting as eToys or Pets.com or any of the hot business to business (B2B) dot-coms that took the market by storm.
But 13 years later, are there any investors who would complain about an 8.6% annual return per year? I doubt there are very many—especially when you consider that the S&P 500’s annual return, including reinvested dividends, was just 2% during the same period.
Now, you might have gotten lucky and bought eBay (Nasdaq: EBAY) at $2 per share and made 16 times your money. Or maybe you bought Oracle and made 5 times your money. But for every eBay and Oracle that became big successful businesses, there were several Webvans that failed and whose stocks went to zero.
In the late 1990s, the stock market became a casino where many investors lost a ton of money and didn’t even get a free ticket for the buffet. It doesn’t seem that we’ve ever completely returned to the old way of looking at things.
My grandfather, a certified public accountant who owned a seat on the New York Stock Exchange, didn’t invest in the market looking to make a quick buck. He put money away for the long term, expecting the investment to generate a greater return than he would have been able to achieve elsewhere (and possibly some income).
He was willing to take risk, but not to the point where he was speculating on companies with such ludicrous business ideas that the only way to make money would be to find someone more foolish than he to buy his shares. This is an actual—and badly flawed theory used by some. Not surprisingly, it is called the Greater Fool Theory.
There were all kinds of companies, TheGlobe.com, Netcentives, Quokka, to name just a few, whose CEOs declared we were in a new era: This time was different. When I asked them about revenue, they told me it was all about “eyeballs.” When I pressed them about profits, they told me I “didn’t understand the new paradigm.”
Maybe I didn’t (and still don’t). But I know that a business has to eventually have revenue and profits. At least a successful one does.
I’m 100% certain that if Grandpa had been an active investor in those days, he wouldn’t have gone anywhere near TheGlobe.com.
One principle that I believe many investors have forgotten is that they are investing in a business. Whether that business is a retail store, a steel company, or a semiconductor equipment manufacturer, these are businesses run by managers, with employees, customers and equipment and, one hopes, profits. They’re not just three- or four-letter ticker symbols that you enter into Yahoo! Finance once in a while to check on the stock price.
And these real businesses can create a significant amount of wealth for shareholders, particularly if the dividend is reinvested.
According to Ed Clissold of Ned Davis Research, if you invested $100 in the S&P 500 in at the end of 1929, it grew to $4,989 in 2010 based on the price appreciation alone. However, if you reinvested the dividends, your $100 grew to $117,774. Clissold says that 95.8% of the return came from dividends.1 (See Figure 1.1.)
