Mark Cuban on the NASDAQ Bubble

I just recently wrote an article about the NASDAQ hitting the 5,000 level, which is just short of its all-time high reached briefly back in 2000.  Right after I wrote that, Mark Cuban wrote an article stating that we are in a tech bubble that is worse than the tech bubble of 2000.

I generally like Mark Cuban.  He has his obnoxious moments on Shark Tank, but he also has his many moments of helping people out.  He is very intelligent and obviously very successful.  And from what I can tell, he actually made his money honestly, through hard work and good decision making.  He really is a great entrepreneur with a great story.

Now he is saying there is a tech bubble.  He doesn’t specifically address the NASDAQ, but that is really where the tech bubble was of 2000.

I think Cuban makes some valid points in his recent piece, but I also don’t necessarily agree with it all.  First, I just want to point out that just because somebody is very successful, it doesn’t make him all-knowing or intelligent in every area.  Warren Buffett is one of the greatest investors of all time and I consider him to be terrible on economics.  His father, Howard Buffett, understood economics.

I think Cuban understands economics much better than Warren Buffett, so I do take his opinion more seriously on this subject.

Cuban is right about people just picking stocks back in the bull market of the late 1990s.  You could pick almost anything, especially tech related, and you would look like a genius.  Cuban was smart enough to cash in on some of his endeavors at that time.  Most investors got caught in early 2000 when the bubble finally started to burst.

In his piece, Cuban talks about angel investors and crowd funding.  He thinks this is part of the bubble.  This may or may not be the case.  But I would hope that people understand the risks of these ventures.  Many of them will fail and some will be successful, just like any business startup.  I actually think these are creative ways of funding startups and it is mostly being done by the free market, although I’m sure some of the money is being directed there because of a previously loose monetary policy.  It is also a way to go around the tradition of getting a loan from a bank.

I actually do think the stock market is in a bubble.  I’m just not sure when it is going to deflate.  Much of it is going to depend on Federal Reserve policy.  I don’t think this is just technology related.  I think the S&P 500 is just as vulnerable as the NASDAQ.

If we hit a deep recession, then maybe a good percentage of these startups will go bust.  And yes, many investors will lose their money.

But I want you to think back to the tech bubble of the late 1990s and the ramifications.  Was it really a tech bubble, or was it just a stock bubble?  The NASDAQ came crashing down, but it wasn’t really the end of the technology boom.

Some of the little startup dot com companies went bust and many investors lost a lot of money.  But look at the companies that survived and have since thrived.

Amazon is an amazing company.  I don’t necessarily think it is a great company to invest in, but it is a great company for consumers.

Apple is enormous now and has been a huge innovator in new technology.

Then there is Google, which has thrived since the NASDAQ crashed 15 years ago.

The internet is 100 times better or more than it was 15 years ago.  Technology is so much greater.  Computers are far faster and far cheaper, even in nominal terms.

In other words, there wasn’t really a technology bust.  It was a stock market bust that brought back realistic expectations.  So even if Cuban is completely right in all of his predictions, it isn’t anything close to the end of the world.  Some companies will go bankrupt and the good ones will survive.  Capital will get reallocated and new projects can begin.

I think the big threats are Federal Reserve policy and big government.  The Fed is responsible for any stock bubbles that currently exist.  Resources have been misallocated on a grand scale and it is going to be painful when the misallocations are revealed and they start to adjust.

I’m not so sure we are in a technology bubble so much as we are in a big government bubble.  The government bubble is going to burst and a lot of people aren’t going to like it.

NASDAQ 5000 and Warren Buffett’s Advice

The NASDAQ hit 5,000 today.  It briefly went above 5,000 back in early 2000, right before the tech bubble came crashing down.  It started going back up and then fell back again in late 2008.

It’s hard to believe that the index went from below 1,500 in 2009 to over 5,000 today.

We do have to consider that the index is still way off its all-time highs in real terms.  Since 2000, consumer prices have risen approximately 35% according to the government’s CPI inflation calculator.

We also don’t know if this is a bubble that is about to pop.  I am pretty certain it is a bubble, but we haven’t seen the parabolic stage yet.  It’s possible we could still see some huge gains before the big fall.

If you invested in nothing but stocks since the spring of 2009, you have done very well.  Of course, this is assuming that you could time the market and buy at the very low point when everything looked really bad.  This is also assuming that anyone who bought at that time is smart enough to know when to get out.

That is the problem with bubbles.  You don’t want to miss the ride up, but you also don’t want to get out too late.  You would rather get out early than too late.

Warren Buffett’s Advice

As I saw the NASDAQ hit 5,000 for the first time in almost 15 years, I saw this article about Warren Buffett giving bad advice.

Buffett doesn’t practice what he preaches (in more ways than one).  In this instance, he says that investors should buy an index fund and hold it.  He says you will beat most hedge fund managers, which may be true to a certain extent.  As Buffett points out, you pay big fees to fund managers, as opposed to small fees when buying an index fund.

The article points out that you would have been better off buying Buffett’s top 5 stock picks over the last 6 or so years than buying an index fund.

I don’t like Buffett’s advice for a couple of reasons.  First, that is not how he got rich.  He bought specific companies that were winners.  This is the main point of the article.

But what about for capital preservation or those who simply don’t have the skills to pick winning companies?  Should you buy index funds?

Personally, I think you should preserve and grow your capital using a permanent portfolio setup, as originally described by Harry Browne.  That means that only 25% would go towards stock index funds.

You aren’t going to get rich investing in the permanent portfolio, but you won’t do that investing in index funds either.  It is to protect wealth that you have already accumulated.

In terms of investing, people like to look at stocks, but they fail to invest in themselves in learning new skills or starting a side business, etc.  This is really the best way to make a lot of money in the long run.

As for Buffett’s advice in buying stock index funds, I wonder if he would give the same advice to someone in Japan.  If you had bought the stock market index in Japan at its high over 25 years ago, you would still be down about 50%.  Buffett would respond that it can’t happen in the United States.  It may be true, but we don’t really know for sure.