Old Stars Don’t Lead New Bulls

One of the most common errors investors make is going back to their list of old favorites: These typically include the former superstars of the last bull market. Prior luminaries include Microsoft, EMC, Dell, Intel, Cisco, eBay, etc.

It’s a function of their comfort levels, a bit of rosy nostalgia for the good old days when everything you bought went up, and money was falling from the sky like raindrops.

It has long been a general rule of markets that new bulls require new leadership. Numerous reasons for this exist, but three stand out in particular:

-Prior leaders fastest growth phase are behind them.
New technologies, products and markets came online; By the time the next Bull market started – usually after a few years of a bear market – those industries and products became mature. PCs are a perfect example; They are like dishwashers or refrigerators that get replaced only when they die. The old 286/386/486/586 upgrade cycle has long been consigned to the dust bin of technology history.

-Success invites competition.

Yahoo begat Google, Intel begat AMD, Dow Jones/ NYT Company begat Typepad and Blogger. This is as it always has been and always will. What are the odds that lightning strikes twice at the same firm?

Excesses of one era set the stage for success stories of the next.
Following the great crash of 2000 (primarily in tech/telecom/internet), the economy flat-lined, leading the Fed to cut interest rates to 46 year lows. Out of those ashes came tremendous activity in Housing and Home Builders, Transportation and Materials, Mortgage Financing and Cash Out Equity Loans – and of course flat panel HDTVs for everyone! These low rates even led to more importing of Chinese goods, which further stimulated their demand for energy and industrial metals. Once this cycle collapses, an entirely different set of leaders are likely to emerge.

The classic example of this phenomenon is the red hot tech stocks of the 1960s bull market. Nearly all of them are out of business today. That period saw big conglomerates ramping up (See Gulf & Western, ITT); The surviving tech names like Xerox and Polaroid and Kodak are now shells of their former selves. This happens with every major advance in technology, from railroads to telegraphs to automobiles to TV/radio to electronics to PCs to . . .

There were many parallels between the late 1990s and the 1960s – at least from a broad technical view. The overall advance in the 1960s got increasingly narrow in its leadership, as investors focused on the Nifty Fifty. In the 1990s, it was the 40 biggest capitalized stocks that were in the mack daddy index of the day, the S&P500. We assume you recall how that ended.

If only it were as easy as simply buying the former fallen stars: Then, everyone would be a stock market genius.


UPDATE June 20, 2006 3:51 pm

Perfect example is Dell, which hit a new 52 week lows today at $23.53.


UPDATE June 21, 2006 5:32 pm

Some people are excited that Dell Chairman Michael Dell, (who presumably knows his business better
than anyone else) has been buying Dell shares (down 43%). Dell bought $70 million worth of stock at $23.99. Remarkably, this was his first
purchase ever, following steady selling every year since 1988,
according to Thomson Financial.

Michael Dell has a net worth of about $13 billion. This "big buy" represented a purchase equivalent less than 1/2of a % of his wealth.

To put this into context of an average person making $100k, owning a home, and a tidy sum of stock in their retirement accounts, its the equivalent of the purchase of 100 shares of Dell stock.


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  1. trader75 commented on Jun 20

    Nicely done. Was that last line a subtle Greenblatt dig?

  2. Barry Ritholtz commented on Jun 20

    Not at all — but I think he borrowed the title from an old cliche:

    Never confuse a bull market with genius.

  3. OldVet commented on Jun 20

    A truism indeed. A related question: why do most stock market analysts assume that the New Bull economies will be the same as the Old Bull economies? Other than counting up accumulated capital assets/capita and saying “Oh boy, America and Japan and UK are so heavy!”

    I used to think it had to do with social and political structures being more focused and reliable in the West. That assumption has fallen by the wayside in recent years.

    Will the golden-boy economies of the Asian Tigers lead the pack in future as they did in the 1960’s? I’m betting that China’s fate hangs in the balance with the US, a symbiotic twin mired in global imbalances.

    Or will a whole new crop of Estonias, Latvias, Indias, and Perus lead the pack the next time around?

  4. MAS commented on Jun 20

    Great lesson!

  5. GRL commented on Jun 20

    Here is where Jeremy Siegel comes in: Over the very long term, the stocks that win are the “tried and true,” that are profitable and pay dividends through thick and thin, but do not have flashy new tech, and hence are not overvalued.

    Think Countrywide, think Phillip Morris.

    Why DO people hate Siegel so much, anyway?

  6. Barry Ritholtz commented on Jun 20

    Who hates Siegel? He’s a good guy — just a little too bullish

  7. Barry Ritholtz commented on Jun 20

    Who hates Siegel? He’s a good guy — just a little too bullish

  8. Ned commented on Jun 20

    Nicely done. Creative destruction is a form of technological evolution in your piece, which works for me. Somebody in a garage somewhere is going to make blogging look like typesetting someday…

  9. ~ Nona commented on Jun 20

    To your point, GRL, I read an article in (I believe) Forbes re: an investor who, after the sale of his company, had to invest multi-millions of dollars. After spending a long time studying the issue, he determined his investment rules, which, as I recall, boiled down to two: only companies of a minimum of 100 years old AND steady through-thick-and-thin dividend-payers.

    The rules he developed guided the investment of his money; his investment success garnered the article about him.

  10. Ned commented on Jun 20

    100 years old! I think the lifespan of companies is getting shorter. Hey Barry I feel another idea for a piece for you to write coming on…how come companies don’t last as long as they used to? Unplanned obsolescence?

  11. ralph commented on Jun 20

    Great point. Seen this many times.
    Anybody got any suggestions for what the next leaders will be??

    Health care?
    Drug companys – biotechs??
    Which bio techs?


    just some questions

  12. trader75 commented on Jun 20

    So to paraphrase the Siegel model, seek out boring, straightforward industries that are deeply impervious to change. A usable thesis, but one that counsels avoidance of market leaders in the first place.

    Methinks there is some funkiness to Siegel’s implied assertions. For one thing, if you’re looking for the biggest total return over a historical period, you’ll naturally gravitate to stocks that have been around for decades–fine for a study, but an arbitrary criterion for an investment methodology. For another thing, going from “these are the best stocks from a long-term historical perspective” to “this is the best possible configuration of your portfolio” is quite a leap. A mini grand canyon leap.

    It may be that an investor with a good sense of timing (and a market leader focus) beats the pants off the Siegel tried and true method. As could a good small cap investor, or a good deep value investor, etc… But Siegel isn’t comparing one *methodology* to another, he is comparing one group of long-run stocks (with survivorship bias btw) to a broader universe of stocks, over a long-run time frame. That’s kinda apples and oranges when it comes to evaluating strategy.

    And by the way, I don’t hate the guy either.

  13. GRL commented on Jun 20

    Who hates Siegel? He’s a good guy — just a little too bullish

    When you posted your blog entry about the evils of (capitalization-based) indexing a couple of days ago, “Beating the S&P500: Less difficult than you thought,” there were a number of anti-Siegal opinons expressed in the comments. In addition, I have seen articles in which Charlie Munger was quoted as saying Siegel is “demented.”

    I am trying to ascertain the reasoning behind these statements.

  14. wcw commented on Jun 20

    I have nothing against most of what Siegel says, but I take issue with his recent implication that active screens like sales- or dividend-weighting are “indexing”. He’s out there recommending an active position and calling it passive, and that just irks me. I disagree with his analysis of risk, but without disagreement there would be no market. That doesn’t much exercise me; he’s just wrong, but not preternaturally.

    As for Munger, he and Buffet were asked if they, the best active-value team in baseball for forty years now, were influenced by Siegel’s latest book, published in 2005. To hear the suggestion that their style sprang from a latter-day repentance by this stock-selection-doesn’t-matter manque might be a forgivable provocation.

  15. ~ Nona commented on Jun 20

    Trader 75, wouldn’t you say that Buffett and Munger seek out boring, straightforward industires w/ big moats? And wouldn’t you say the companies they choose are willing to change within their areas of competence, using steady improvement (and incremental change) as their guidelines?

  16. Ryan commented on Jun 20

    In my opinion, one of the next tech leaders will be:

    Seagate/Maxtor (STX)–Memory is now being used in everthing and this company is well positioned due to its merger to exploit the next boom

    I think good performing stocks in the coming bear market will be:


  17. spencer commented on Jun 20

    My experience has been that old leaders tend to be the new leaders in the initial or first stage of a new bull market. It stems from managers returning to what worked last time. But it quickly proves to be a
    sucker rally that is just strong enough to sucker everyone in before new leadership emerges.

  18. HT commented on Jun 20

    1. I’m with Ralph–So point well taken [don’t intend to be mean Barry, not a new one either]–But, where does that leave us now as to new leaders? Personally, I am in the camp that gentleman prefer cash right now, but that’s short term.

    2. Unrelated, but did anyone pick up on the FT piece on China’s possible inflation [OK, may more un-deflation] risk?? Point: It’s likely that the world has experienced less inflation largely because of the ‘world is flat’ globalization deflationary effects of India and China. If this goes away–along with [and here I agree 100% with Barry] that the CPI is plain wrong, the inflation shock could be even greater.

  19. Barry Ritholtz commented on Jun 20

    BTW, when we look at the top performing S&P 500 stocks since the October 2002 lows, Yahoo is usually in the top 20.

    Thats why I say rarely as opposed to never.

  20. C commented on Jun 20

    Ryan, I agree with you about STX.

    Perhaps the story of my relationship with this stock will be instructive vis a vis psychology/sentiment and the learning curve of naive investors:

    I bought STX in Sept ’05 at $15.77. It looked incredibly undervalued to me.

    I sold it in Oct ’05 at $16.00. This was a panic response to the market downturn that occurred around that time. I decided I didn’t have the stomach for investing and sold everything, willy nilly.

    STX had risen to over $25 by January ’06. Now this is the interesting part. I wanted absolution for my foolish decision back in October. If only I’d held onto it! I bought it again at $25.95, believing that this was still a great company with great fundamentals.

    The stock has fallen to $21 and change since then. I am amazed. I am sitting on nearly a 19% loss. The fundamentals haven’t changed. Why does the Street hate this stock?

    But I am an investor, not a trader. At this point I am holding onto this stock until they pry it from my cold dead hands!

    John Dvorak has a sanguine appraisal on STX at Marketwatch.com (june15,2006).

    I don’t know about the next big thing that will be the catalyst for a new secular bull market. I am pretty sure it will not be anything related to healthcare, drugs or biotech. Those are all too vulnerable to lawsuits with huge jury verdicts in favor of plaintiffs.

    I would lean toward food (agricultural commodities), water, alternative energy and quality-of-life enhancing products (travel and leisure, organic foods, water purification, music and video delivered to the home via broadband), etc.

  21. Si commented on Jun 20

    Thx, Barry, nice to see a recognition that the PC cycle is not what it used to be. Can get pretty frustrating when ever there is a tech decline and all I seem to see is people on TV/Web talking about the next great mythical PC Upgrade Cycle.
    Also got me thinking about software, does anyone else find less value added in each upgrade. Its kind of got to the piont where I dont really bother anymore, unless of course there is some compelling reason.
    Just thinking out loud……

  22. whipsaw commented on Jun 20

    per Si:

    “Also got me thinking about software, does anyone else find less value added in each upgrade. Its kind of got to the piont where I dont really bother anymore, unless of course there is some compelling reason.
    Just thinking out loud……”

    If you are referring to windoze, there hasn’t been a defensible reason for upgrades except for EOL decrees from M$. As far as M$Office goes, every IT director should be required to explain why a paid upgrade is preferrable to Star Office (maybe $80 per seat) or OpenOffice (free) which would flush out a lot of the corruption that is the foundation of the IT industry.

  23. DavidB commented on Jun 21

    My guess is alernative energy will probably stick it’s head up soon. I think a major focus will be turning garbage into something more useful than landfill. Once politicians can be convinced that they can run their cities on the garbage that they throw away our energy ‘crisis’ will be solved

    I also think our modes of transportation will have to be revamped to become more efficient

    I also hear the nanotech revolution is just around the corner making everything and everyone superstrong, superclean and superhealthy

    We heard about virtual reality in the past, I wonder if that will meet up with HD at some point and send us into our own little worlds

  24. Kevin commented on Jun 21

    100 years old! I think the lifespan of companies is getting shorter. Hey Barry I feel another idea for a piece for you to write coming on…how come companies don’t last as long as they used to? Unplanned obsolescence?

    For one thing because technology changes faster and because the United States is more willing to reallocate capital from old companies to new and less willing to allow old companies to dominate just due to seniority. I think it is one of our greatest strengths.
    In Japan, by comparison, the companies are much older. Mitsubishi goes back to the start of modernization in the late 1800s and Mitsui is hundreds of years old. Sony and Honda, as post-WW2 companies are the relative newcomers.
    Companies last longer in industries where the cost of entering the field is so high that newcomers will not enter no matter how poorly the current companies are run (for example, GM and Ford).

  25. Ned commented on Jun 21

    “Companies last longer in industries where the cost of entering the field is so high that newcomers will not enter no matter how poorly the current companies are run (for example, GM and Ford).”

    I think the Chinese are coming after GM and Ford, right? In a global economy those moats that Warren and Charlie look for are harder to find.

  26. G Word commented on Jun 25

    As we collect more and more information the question will be how we manage that information in the future. Eventually, we will have no option but to either trash it or organise it in a way that we can access it easily (no easy feat – I know that myself). How many of us have a portable hard drive as well as our computer hard drive? How long do you spend organising your hard drive? How much of your hard drive information do you access on a regular basis? How long does it take you to find that information on your hard drive?

    Information management is something that everyone will need going forward and the microsofts, googles and yahoos of this world are miles away from providing a workable solution for this.

    The leader in this field is Autonomy (www.autonomy.com). Have a look at the site and at its client list. If this baby is not picked up by one of the big tech heavyweights, I will be surpised.

    The G Word

  27. Harry commented on Jun 26

    If we are in a bear market will natural resources take the lead coming out or is that yesterdays bull stock?

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