As the stock market continues its amazing run into record territory, it seems as if every day there's a new expert calling for a top -- often comparing the current state of the market to that of the late '90s, right before the Internet bubble popped. However, Dan Zanger, arguably the most successful investor during that period, disagrees.
"There is certainly some frothy behavior, with many stocks overpriced, while others are priced to perfection, " says Zanger. "However, this market is far from the 'bubble' behavior that we saw in 1998-2000."
Zanger knows what he's talking about, having cut his teeth in the markets, with various degrees of success, in the early '90s. But it wasn't until he became a student of William O'Neil's CAN SLIM method, which looks for stocks with strong fundamentals and technically significant chart patterns, that he catapulted to the rarefied heights of the investing world.
Beginning in June of 1998, Zanger spent 18 months turning $10,775 into $18 million -- an unofficial world record for stock market investing -- which translates into a mind-blowing 164,000 percent return (and yes, he has the tax returns to prove it). Just five months later, as the bubble was getting ready to burst, that same account had grown to a massive $42 million dollars, a feat that Trader Monthly ranked among its 20 Greatest Trades of All Time.
Because of his unique experience, Zanger sees significant differences between the current market and the one he operated in during the bubble.
"Price movement in this market is nowhere near what we witnessed in the late '90s," he says. "Back then, you had stocks doubling in two days and some tripling in just five days. Most days, though, you were more likely to see many stocks running up $25 to $75 or stocks like Amazon going from $327 to $600 on the day of a 3-for-1 split. Today we see very few splits, and stocks are not racing up. It would be more accurate to say they are melting up slowly."
As impressive as his returns were during the bubble years, perhaps even more impressive is the fact that when the market crashed, unlike other high-flying investors who lost everything, Zanger saw the warning signs and was able to emerge from the carnage with a good chunk of his fortune intact. So what signs would he look for to determine if the market is nearing the end of a bubble phase?
"Well, excessive price-to-earnings ratios would be a good sign, for one," he says. %VIRTUAL-article-sponsoredlinks%"For example, the S&P 500 (^GPSC) trading above a price-to-earnings ratio of 25 and stocks racing up in a manner similar to what we just saw with Twitter would qualify. This stock has behaved very much like an Internet stock from the bubble years, going from $41 to $75 in just a few weeks. But as I mentioned before, this same price action would more typically have happened in just a few days during a true bubble like 1998-2000."
In the years since the bubble burst, Zanger has remained involved in the markets, investing his own money and running Chartpattern.com, where he interacts with other investors on a regular basis, helping to teach them the rules and strategies that made him successful. And as for the chances of another true bubble in the markets, Zanger's skeptical -- at least in the short term.
"Much of a bubble's behavior is rooted in herd mentality and fueled by a new set of rookie investors who believe the market will never go down," he says. "I think there are far too many people today who remember the bubble bursting in 2000, so I doubt there are enough people with an undeniable belief in the market -- something that would be needed to make a bubble happen again. At least I hope that's the case."
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Though flower bulbs might seem an unlikely asset to trigger rampant speculation, the Tulip Craze is often cited as the first recognized economic bubble. In the 16th century, tulips were first brought from Turkey to Western Europe, where the colorful flowers became extraordinarily popular. But it was in the 17th century that the vivid blooms hit super-fad status, especially in Holland, where they become a much-sought-after luxury item. By the 1630s, some rare varieties of tulip bulbs traded at prices equal to that of an house, with the entire limited supply of bulbs changing hands multiple times every day. Based on the limited price data still available, the Dutch tulip bubble apparently reached its peak in early 1637, after which prices plunged by 95 percent to 99 percent in the span of just a few weeks.
Before the economic meltdown of 2008, the biggest bear market that most living investors had seen was the plunge from 2000 to 2002 -- the Dotcom Bust that resulted from a bubble in Internet-related technology stocks. During the late 1990s, the adoption of the Internet for commercial purposes led to an explosion in investing, as the early successes of AOL and Amazon.com convinced many investors that just about any business with a connection to the Internet would produce huge profits. But many of these businesses lacked any reasonable strategy or plan to profit, and the result was, eventually (and inevitably) debacles like Pets.com. Although some high-flying tech firms survived the Internet bust, the vast majority met their end during the bear market.
Looking at the large population of the Sunshine State today, it doesn't seem all that surprising that Florida real estate would have a history of high demand from land speculators. During the 1920s, the strong economy and soaring stock market left many Americans with the means to invest. The general perception of Miami as a paradise led to unprecedented marketing efforts from developers who sought to create brand new cities well into the Everglades. As brokers and dealers pushed plots to investors, trading activity reached a fevered pitch. But when negative reports from financial publications brought the true value of the land to light, buying interest dimmed, and an ill-timed hurricane put an end to the boom in 1926, leaving Florida in the grips of economic decline that lasted until after the Great Depression.
When investors think about precious metals, rhodium isn't the first to come to mind. But during the first half of 2008, prices of the rare metal shot from less than $1,000 an ounce to more than $10,000 before plunging back to the $1,000 level when the financial crisis hit. Because its most common use is in catalytic converters for cars, investors saw rhodium as a play on the auto market, and its rarity helped inspire speculators to keep bidding prices higher. Yet -- just as had happened earlier in the decade with palladium -- the rhodium boom came to an end quickly once it became clear that demand wouldn't support the inflated prices.
After its defeat in World War II, Japan recovered and became one of the fastest growing, strongest economies in the world. By the 1980s, it was commonly predicted that Japan's economy would soon exceed the size of the U.S. economy, and that the country's culture and language would come to dominate the global commerce. Land speculation helped fuel the Japanese economy, but the availability of cheap financing led companies to take on increasing levels of leverage in their real estate portfolios. From 1984 to 1989, the Nikkei stocks\ index soared from below 10,000 to nearly 39,000, only to plunge in the ensuing years when the bubbles burst. The Nikkei touched the 14,000 level in 1992, and the land of the rising sun settled into period of economic stagnation that still persists today.
The moral of these stories: While it's impossible to know when Bitcoin's bubble-like rise will reverse itself, given the weight of history, it's almost certain that it will.