The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

APPENDIX G1

1980 Revisited

From my March 6, 2000, Forbes column.

Tech stocks are in a late-stage bubble. It should break later this year. I usually dislike “bubble,” a word bandied about too often by extremists. But I watched a bubble like this one 19 years ago, and I have seen how it ends. Right now technology stocks are just where oil stocks were in early 1981.

Recall how unstoppable energy appeared in 1980. That was a time of high and rising inflation, booming commodity prices, OPEC’s success as a cartel and the Iran-Iraq war. By late 1980, oil was $33 a barrel, with consensus forecasts of $100 four years out. No one envisioned oil’s falling.

It’s happening all over again. This time around it isn’t oil’s price that is supposed to triple in four years, but rather the population of Internet users.

Here are some other disturbing similarities. Tech’s share of the S&P 500 has grown from just 6% in 1992 to 19% in 1998 and 30% in 1999. Energy’s S&P weight climbed from 7% in 1972 to 22% in 1979 to 28% at year-end 1980. You know about Technology’s great returns: rising 44% in 1998 and 130% in 1999. In 1979, Energy stocks were up 68%, and in 1980, 83%.

Then the bubble popped. The Energy sector’s weight fell to 23% by the end of 1981, mostly in the second half of the year. Energy stocks lost 21%. The S&P 500 lost 4.5%. In 1982, Energy stocks fell another 19%, while the S&P rose 21%. Since 1980 the Energy sector has returned 9% per year. It has lagged three points a year below the next-worst-performing ...