One of the greatest dangers in today’s investment landscape is the widespread presence of dreaded market bubbles. These pernicious anomalies have been happening with frightening regularity over the last 20 years or so. And while market bubbles may be fun on the way up, the fun always ends eventually. They are simply bad news for prudent, long-term investors.
Our two decades of bubble purgatory started off in the late 1990s with the arrival of the technology bubble 1.0. This was a time when ridiculous startup companies such as Pets.com, Kozmo.com, Boo.com and Webvan all traded at insane valuations on the stock market. Few of the companies caught up in this bubble had positive earnings or cashflow, instead relying on uninterrupted access to the capital markets to fund their daily operations.
When the bubble inevitably collapsed, few dot com businesses were spared. The technology-heavy NASDAQ 100 index declined by a staggering 83% from its spring 2000 peak to its fall 2002 nadir. Investors foolish enough to play in this bubble wonderland bitterly regretted their choice in the end.
A few years later, the U.S. Federal Reserve, not satisfied with only subjecting the American public to a single market bubble, quickly inflated a housing bubble by holding interest rates too low for too long. This resulted in average people all over the country being scammed into buying multiple houses, often with exotic interest only, floating rate or negative amortization mortgages.
The gains, driven by low interest rates and loose lending conditions, were tremendous at first. But, as with all market bubbles, few investors managed to get out before the historic 2008 housing bust. Housing prices, which had last declined nationally during the 1930s Great Depression, did so again, wiping out heavily leveraged speculators and naive investors alike. The ensuing financial panic was so severe that it nearly destroyed the world’s banking system.
Once again, the U.S. Federal Reserve decided that three bubbles would certainly succeed where two had miserably failed. Therefore they dropped interest rates to almost zero and have held them there for 8 years and counting now. Predictably, almost all stock and bond markets have rocketed skyward during this time. But neither profits nor revenues have kept pace with asset price increases.
In today’s technology 2.0 bubble, companies like Facebook, Amazon, Tesla and Netflix trade at absurdly high price-to-revenue ratios. In addition, “unicorn” startup technology companies, defined as venture capital funded firms with implied market caps above one billion dollars, are everywhere – with an estimated 229 in existence as of January 2016. Uber, a startup online taxi service that lost about 3 billion dollars in 2016, flaunts a $62.5 billion dollar market cap, higher than that of Honda, Ford or General Motors! Even normally staid non-technology companies like McDonalds, GE and Starbucks have seen their stock prices rise dramatically with little real justification.
This means that, for an astonishing third time in only 20 years, we are in the midst of yet another market bubble. And this one will most likely be even more damaging than its predecessors due to its sheer breadth. Almost every traditional asset class from high yield bonds to corporate equities to commercial real estate has been caught up in the mania. By extension, most investors, even those who believe they are playing it safe, will inexorably be hit by the collateral damage from the eventual bust.
Of course, if you are willing to explore the world of unconventional assets, there are hidden investment gems to be found far removed from cancerous market bubbles. The art and antiques market is a prime example. These tangible assets have been a key wealth building tool of wealthy households for centuries, yet fly underneath most investors’ radar.
Investment grade antiques merge five desirable attributes – portability, quality, durability, scarcity and zeitgeist – into an aesthetically attractive package. This category of the antiques market has some of the greatest works of art known to mankind. Among them are the Shah Jahan Cup, a 17th century Indian Mughal carving made from a single piece of solid jade, the Hope Diamond, a reputedly cursed 45.52 carat, deep blue diamond now housed in the Smithsonian museum and the Brasher Doubloons, a series of six of the very first gold coins made for the fledgling United States in 1787.
Luckily for today’s investors, not all investment grade antiques are famous, million-dollar masterpieces. In fact, it usually only takes a few hundred dollars – and occasionally less – to buy a beautiful, historically significant and highly desirable antique that is sure to appreciate for decades to come. Antiques may not be the talk of the investment community right now, but that is a good thing. I’d rather put my money into undervalued antiques than ride the stock market bubble down for another 50% or greater loss.
