My next trading lessons story comes courtesy of the roaring ’90s – and the resulting dotcom bubble that eventually burst.
In 1996, I took a job with Sunkist Growers as their Pension and Investments Manager. This was a mature fund – many beneficiaries were drawing monthly pensions from it, and because the company had been around for 100 years, the plan was old. I was hired to step up the pace of returns relative to the minimum required contribution by the company owners.
The 1990’s saw markets rise sharply, and as the decade ended, a thirst for risk had taken hold. Additionally, the Fed flooded the financial markets with liquidity due to the potential of a catastrophic Y2K event. The fears turned out to be unfounded, of course, but by 2000, it was too late. The horse was out of the barn, and stock prices had catapulted to nosebleed levels. The stock market was greatly overvalued, and I was fully entrenched in the bubble. It was a fun ride, but a great lesson in humility, risk management and diversification.
When I started my career as pension manager, I had $7,000 in my personal trading account. Not much to work with, but I could margin up to at least a five figure stake. As long as I was paying attention, I figured I’d be fine. I wasn’t trading options back then (well, only sparingly to sell premium), but I was fascinated by the Internet and dotcom names that moved up sharply each day.
Despite the stock market frenzy, everything wasn’t coming up roses during this time. The Asian Contagion crippled economies in 1997, the Ruble crisis hit Russia in 1998, and the collapse of Long Term Capital Management (also in 1998) nearly destroyed the global financial system. These large events were quite concerning and had many people worried about a global economic meltdown. But, as we know, these crises are often contained and fixed with capital infusions.
With heavy flows of capital into the equity markets, IPO’s were being issued on a near-daily basis. As I mentioned above, investors had a good appetite for risk. Valuations didn’t seem to matter as money continued to chase stocks. 401K’s were being stuffed and mutual fund flows were hitting a zenith during this time. Markets were soaring to all time highs on a regular basis, and all you heard during cocktail parties was “My account is up a zillion percent this month alone! It’s so easy!”
Back at my desk, I was thriving in this asset bubble. You never knew what the new flavor of the day would be – just that there would be one. Yahoo, Doubleclick, CNET, CMGI, Internet Capital Group, Excite, Go.com, Lycos, Infospace – these stocks were white hot and getting hotter by the day. Today, many of these companies are history, but I’m getting ahead of myself.
Of course, I couldn’t resist playing the game, nor could I get off the gravy train if I tried. My little account exploded each day, week and month. I would leap like a frog from stock to stock, buying and selling, buying and selling. My strategy worked. By the end of the millennium, my $7,000 had grown to over $450,000 in equity value.
My account grew because I was margining up to the hilt at all times. I only sold when it looked bad (which wasn’t often – the markets were quite forgiving). By end of February 2000, my account had grown to $550,000 and I had over $1 million in stock holdings. Do the math: that represents a 50% margin. Now, I did take some plays off the table to start my hedge fund, pay some bills, and complete some much needed home repairs. But that margin balance was far too big, and it became a grave error that would bite me hard over the next few months. That will be my next story.
Copyright: asife / 123RF Stock Photo
