In 2001, Cisco Systems had a 205 price/earnings ratio (P/E ratio). Today, 16 years later Cisco has $50 billion more in revenue and $10 billion more in net income. However, the market cap (at $160 billion) is still only 30 percent of its market cap prior to the tech crash in 2002. Do investors have amnesia or is investing in overvalued companies different today?
Just to be fair to the conversation, we can say being an Apple fan has paid off for average Americans across the country. Apple is one of the most popular stocks on the planet. People have retired off the stock's phenomenal rise in the last decade. In January 2005, the stock was trading for around $5 a share and in 2015 was trading about $130 a share and was the most valuable company in the world then. Hmmmmm…do you wish you had invested?
Remember when the Dotcom Bubble burst into the Silicon Valley air? That was very painful for a lot of people, but the Cisco’s, Apple’s, and Microsoft’s of the world survived. Why? Because they have good products, that’s why! Today, Netflix has a P/E of 205 and lost $2 billion last year. Amazon has a P/E of 190. Are these companies better than Cisco, Apple, Microsoft?
Netflix has risen like Icarus but is it too close to the sun and will burn up? To be fair I should mention the powerhouse of streaming media and original movies Netflix has created, and let’s just think about the failures that have turned into great innovation, which equals success that has turned into profit. That’s why we invest in the “belief” of a product that we know is good and has the absolute potential for success. But that doesn’t mean they should be grossly overvalued.
Let’s look at one more company. Amazon has an impressive stock price history -- perhaps one of the greatest over the past two decades. After accounting for three stock splits, Amazon's shares have advanced from $1.50 in May 1997 to over $850 today -- a 56,500% return! I think I’m feeling a little queasy for not investing in that little gem.
What do all these successful companies have in common? They all have been a part of the roller coaster relationship of the stock market and —YOU. That’ right, I said it. You have lost money, patience, and faith. Wall Street’s greatest friend is amnesia. We forget. I’m not going to say that any of the companies mentioned today are going to drop like Cisco but history has been a great source of information for predicting the future. The beauty of time is that we forget and we forgive.
We also must look at another investment performance during the same period when Cisco was repriced. That investment is gold.
Gold dates to ancient times and has, and will withstand the test of time. In 2001, gold was at $250 and today it’s at $1270! That’s at 400% increase! Gold investments aren’t for everyone and at times not for the faint of heart. However, while gold is no longer in the forefront of everyday transactions, it is still important in the global economy. To validate this point, one needs to look as far as the reserve balance sheets of central banks and other financial organizations, such as the International Monetary Fund. Presently, these organizations are responsible for holding approximately one-fifth of the world's supply of above-ground gold. In addition, several central banks have focused their efforts on adding to their present gold reserves. So even the central banks of the world understand the value of gold as an investment. Do you?
When the next financial reset occurs and the Netflix and Amazon's of the world get potentially the same treatment as the Cisco Kid where will the price of gold be? If it experiences the same run as the last 15 years the price would be over $6,000. Would you invest if you knew it would hit just $4,000? What about $3,000? Do I hear $2,000?
So, the moral of the story is, investor amnesia can keep us hopeful but it comes with risk. I would rather feel the pain of my last mistake such as investing in Cisco and never forget it and certainly not do it again with the Netflix and Amazon’s of the world. How about you?