Throughout the week, the UK has been battered by three storms; over 20 years ago, investors were feeling the effects of a tornado type that wiped out their returns.
Back in 1999, after several years of strong performance from technology and telecoms stocks – which gave birth to such funds as Gartmore Techtornado and Framlington NetNet – like the bins in my neighbour’s garden, returns came crashing down to earth.
While I only started investing 11 years ago, I know that for years after the tech, media and telecoms (TMT) bubble burst, tech funds were treated with extreme caution, with investors fearful of being burnt again.
Investing in Tech Stocks
Fast forward to today and investors have seemingly forgotten, or more likely are unaware, of the lessons learnt in 1999 and are looking to buy the dip in largely speculative technology assets.
This is hardly a surprise, given what has happened in the past decade. Over the period, technology has primarily improved lives, but in the investment world, investors have not only been rewarded for buying tech, but in more recent years, the more speculative tech you have bought, the better your returns have been.
Indeed, since I have been investing, there have only been one or two years in which tech stocks have not successfully rewarded investors. If you had held a combination of growth and tech stocks, you would have also done very well, most of the time. However, over the last five or so years, investor attention has shifted to focus on more speculative assets, with many innovation funds seeing supernormal returns, that is, until last year.
Investor Influences
Without trying to sound old and grumpy (like some of my colleagues), many newly minted investors are intensely focused on making big bucks, whilst simultaneously ignoring the need to protect those returns. In short, they are buying the story, and no story is quite as alluring as those in the blue sky world of technology.
The technology sector has always been prone to investor exuberance and grandiose, but unrealistic company promises. Pre 2000s, excited investors would discuss equally exciting investment opportunities like Pets.com on forums, but the advent of social media, and the echo chambers that can result from them, has made selling the technology dream even easier.
The result is that many younger investors haven’t learnt the lessons from 2000 unless they had read about them. That is not to be critical; it’s how investing often works, but the outcome has again been to pile into tech stocks and those closely associated with them.
This leads us comfortably, or perhaps uncomfortably, into the often murky world of crypto, the ultimate and possibly most speculative of all digital assets. Critics argue that cryptocurrencies lack fundamentals. However, the fundamental force driving crypto returns (and other speculative technology stocks) is closely interlinked with the level of social media buzz/hype – otherwise and traditionally known as momentum.
The Dangers of ‘Buying the Dip’
But is there a danger that, considering the recent pullback, these ‘buy the dip’ investors are set to be catching falling knives in a more inflationary environment?
Part of the reason that things have gone on for so long is that, with little inflation, the central banks could keep coming to the rescue every time markets have had big sell-offs. However, this is not the case anymore, and those retail investors buying the dip based on the old story of being saved (the Fed put) could get burnt.
Inflation and Fundamentals
So, we have a new battle emerging in the investment world, the struggle between the ‘buy the dip’ crowd and fundamentals. Fundamentals haven’t mattered in the past decade, but we would argue they will become much more relevant in the face of inflation.
The concern for tech investors is that as soon as prices start to revert, problems will arise. If inflation stays elevated, and the fundamentals are now worse for many of these tech companies, then further rounds of selling could well take place. Of course, when talking about inflation, we don’t mean it has to stay up at 6%, but it just needs to be consistently higher than it has been.
With technology stocks offering investors such generous returns over the past decade, it is easy to see why so many will have forgotten the importance of fundamentals. But as we have already seen, things really are starting to change across the investment landscape, and as we have been saying for a while – we think the next 10 years are going to look very different from the last for investors.
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