The last time we saw this much concentration was during the tech bubble of the early 2000s. I don’t believe our current situation is exactly like the tech boom of 1999 and the bust that followed, as today’s leaders are actually very strong companies with dominant market position. However, investors have piled into this sector, so they come with high price tags relative to their sales and earning much like in 1999.
What we did see once tech began to crater in the early part of the 2000s was there were plenty of other sectors that did very well. I believe we could see the same thing over the next year.
If you invest in dividend-paying stocks — a key holding for income investing — you may feel such stocks have lost their luster. But I don’t think this trend will last forever. Over the last three years, dividend-paying stocks that regularly increase their dividends averaged a 5.4% rate of return per year, while their non-dividend-paying counterparts (growth-only stocks) were up 11.5%. Many folks may be questioning whether dividend-payers will ever come back.
The last time a discrepancy like this happened was between 1995-1999. Growth-only stocks averaged an annualized 29% increase versus 17% for dividend-growers. Then, from 1999 to 2001, dividend growers averaged +10% versus -8% for growth stocks. Yep, they were up 10% during the tech crash, while purely “growth” companies lost money.
I want to share the Oracle of Omaha’s “lag story.” From mid-1998 to the end of 1999, Warren Buffett wasn’t in tech at all. He stuck to his knitting, preferring his pre-tech investment strategy. During that same time, he was down 28%, while the S&P 500 rocketed up 32%. So, call it an almost negative 30% compared to positive 30%+.
People opined that the Sage had lost his touch. Over the next 10 years, however, the S&P 500′s total return was negative 9%, and Buffett was up 76%.
The moral of this story isn’t that the tech sector is bad. Not at all. However, at some point, we could see today’s underperformers become tomorrow’s winners, due to an age-old investment maxim called reversion to the mean.
Right now, tech has the rest of the market in handcuffs. And that makes sense. The COVID-19 economy is ripe for that sector. But we’ll likely return to spending our evenings and weekends away from screens; it’s just a question of when.
So, think of it in terms of the entire market. It’s filled with hundreds of other companies that run fantastic businesses. These merely seem out of favor for the time being. The handcuffs will come off eventually, maybe as soon as the spring if vaccine hopes come to fruition.
Beware the desire to chase today’s narrow list of high-flying stocks. This feeling usually only happens in times of extremes. Keep it consistent.
When one style — like growth or tech — trounces everything else for a long time, investors tend to flood these stocks, thinking the ride will never, ever end. Instead, the stock heavyweights of the day eventually get trounced by their counterparts in a reversion to the mean. I think dividend-paying stocks are the Rocky Balboa in this story. We don’t know the time nor the hour, but at some point, I think we’ll likely see the underdog turn into the comeback kid.
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