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July 20, 2015

The Return Of The 4 Horsemen Of Tech

This morning, as I returned to my office from my family summer vacation, I was greeted with an email from a good friend and fellow colleague asking if I had read the following in USA Today. To wit:
"Giddy up! The Four Horsemen of Tech -- Google, Apple, Amazon, and Facebook -- helped push the Nasdaq to an all-time high Friday morning.
These Four Horsemen dominate the Nasdaq. They are the tech equivalent of Triple Crown winner American Pharoah. Or his jockey, Victor Espinoza? He's the actual horseman after all. Either way, these four are collectively worth nearly $1.7 trillion and are expected to report sales of more than $425 billion this year."
But here was the most interesting line in the story.
"But for now at least, Apple, Amazon, Facebook and Google are galloping way ahead of the rest of tech."
So, what makes this story so interesting?
After all, technology stocks have been on a strong rise as of late. Furthermore, technology is becoming ever more embedded in our daily lives (and ultimately the economy) than ever before from "smart watches" to "smart houses." Therefore, it makes complete sense why companies like Apple are doing so well.
However, that is only one part of the story. Ultimately, all companies, and particularly those in the technology space, are subject to business and economic cycles. More importantly, these companies, in particular, are subject to consumer demands. For example, Apple is a great company with great products and consumers love those products. However, what happens to Apple if a competitor comes out with a better product? Or, how about Facebook? Do you remember companies like Palm Computer, Blackberry, and MySpace?
Consumers are very fickle creatures, and brand loyalty will only last so long. Like the article states, while Google, Apple, Amazon, and Facebook are on the top of their game today, in the next 10-years it could well be companies like Xiaomi, Snapchat or others that do not even exist yet.
Companies that can successfully innovate and adapt to ever-changing consumer trends will remain successful for a very long time. For example, Microsoft and Yahoo have been around since the 90's, they are still large and successful companies, but innovation has become a real challenge for them. As such, stock performance has languished compared to their peers. 
(The chart below represents the percentage performance over the given time period)

But those musings are not what interested me about this story. No, it was the "Deja Vu."
I have been around the money management and investing game since the late 80's. I have seen trends, fads, and cycles all come and go. All of them had one thing in common, a belief that "this time was different.'" Whether it was "portfolio insurance" in 1987, a smarter group of investors in 1998 with "Long Term Capital Management," an innovation of technology or a "Goldilocks economy," they all ended the same as "reality" ultimately crushed the fantasy.
So, why did this particular story seem so familiar? Simply because I have seen these same headlines in the past. To wit:
"Cramer's Four Horsemen Of Tech" - September 25, 2007
"Take Cramer's 'Four Horsemen of Tech,' for instance. Apple, Research in Motion, Google and Amazon.com are up 31% as a group since he recommended them back on June 6. Despite the market being down today, each of these four stocks hit new highs."
"The Four Horsemen Of The New Economy" - October 2, 2000
"Meet the new bosses: the Four Horsemen of the New Economy. More than any other collection of companies, Oracle, Sun Microsystems, EMC, and Cisco Systems represent the building blocks of Net business. Chances are, every company moving online will buy a piece of hardware or software from one of these four giants.
But just in case my point escaped you, let me plot these headlines on a price and valuation chart.

Is it just coincidence that these articles all discuss the same thing at the previous peaks of"bull market" advances? Probably not. The psychology of market advances, and particularly late stage advances, are all built upon the "exuberance" and "short-sightedness"of investors. As "greed" is fed by a seemingly inexorable rise in asset prices, the belief "this time is different" grows. But this has not been just the case at the previous two major market peaks, but at every peak throughout history whether it was related to railroads, real estate or stocks.
Importantly, since I am often alluded too as a perma-bear for pointing out things like this, I am NOT suggesting that the markets are about to "crash" tomorrow. Nor am I implying that you should sell everything thing and build a bunker(My portfolio model continues to remain at full equity weighted exposure currently.)
What I am suggesting is that everything revolves in cycles. As such, this current investment cycle will end and will likely end rather catastrophically for those that have forgotten that investing is ultimately based on valuations and psychology. 
I often wonder if the writers of these stories have ever actually read the Bible and Revelations 6:1 which discusses the "four horsemen" that are not a good thing.
When "the Lamb of God" (Jesus Christ) opens the first four of the seven seals, he summons forth four beings that ride out on white, red, black, and pale horses. Although some interpretations differ, in most accounts, the four riders are seen as symbolizing Conquest, War, Famine, and Death, respectively.
As I said, they are not a good thing. Likewise, references to them in the financial markets have not been a good thing either.
Considering that writing articles entitled the "4 Horseman of Technology" has been the"breaking of the seal" that lead to investor destruction twice in the past, maybe this "time should be different." Maybe this time investors should pay a little heed to history which"never repeats but often rhymes."
I'm just say'in.
Courtesy Lance Roberts at StreetTalkLive.com (More Articles Here      

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