What My Summer Vacation 22 Years Ago Means for Investors Today

Editor's note: In today's Weekend Edition, we're taking a break from our usual fare to share an essay from our colleague Enrique Abeyta – one of our friends at Empire Financial Research. In it, he discusses the historic bubble taking shape in the markets right now... and what the dot-com boom's lessons can teach us about how to profit today.

The situation in the markets today reminds me most of the late 1990s... back in the early days of my investing career.

While I had an interest in stocks dating back to high school and my time at the Wharton School at the University of Pennsylvania, I didn't really begin working as a full-time investor until 1997. That summer, I joined my first buy-side shop – Atalanta Sosnoff Capital.

Atalanta Sosnoff managed almost $3 billion in assets and had only a handful of investment professionals. This presented a great opportunity... and in 1998, within a year, I was a portfolio manager.

That was also when I got some of my first lessons on how the stock markets really work. And as I'll show you, those lessons are crucial for any investors who are looking to make big profits today...

In 1997, we had seen an emerging market crisis that began in Thailand and then swept through the rest of Asia.

U.S. stocks initially sold off on this news, but still proceeded to have an outstanding year – up 33% in 1997.

But at the time, none of us knew that another crisis was brewing quietly much closer in Greenwich, Connecticut – the headquarters of world-renowned hedge fund Long-Term Capital Management ("LTCM").

Having come from the bond side of the business, I had heard of LTCM's famous founder John Meriwether (the former head of bond trading at investment bank Salomon Brothers)... but given that I ran an equity portfolio, I didn't think much about the firm.

That summer, during a week that I had taken off for a trip to Colorado, many of the stocks in our firm's portfolio began to act absolutely crazy...

One stock in particular – Chancellor Media – would cause me a massive amount of angst. Chancellor had been a great investment... The company had been "rolling up" the radio industry.

These days, radio is left for dead... but back then, it was booming. Chancellor was buying up stations like crazy using debt and financial engineering. That might sound like a risky strategy, but it was actually a savvy approach.

The stock had massive momentum... But it also spoiled my vacation.

At some point as I was driving through the Rockies, I started receiving panicked calls from our trading desk about Chancellor. The stock was trading down 10% in the morning... and saw another 10% drop by midday. At one point it traded down almost 50%.

Remember, this was back before e-mail on phones or messenger or pretty much anything except phone calls. So I frantically called up analysts and trading desks across the Street trying to figure out what was going on...

The answer was... nothing. Not a single analyst or trader had any news whatsoever. The only thing they knew was that investors were frantically selling Chancellor's stock.

As I spoke to my frustrated portfolio manager, I told him what I had learned. After more than 20 calls (including to Chancellor's investor relations department), I heard absolutely no reason why the stock was down. My recommendation was that we stick with Chancellor.

The clearly annoyed general partner agreed to keep our position... mostly because he likely thought it was crazy to sell the stock when it was down so much.

Little did we know that LTCM was unwinding in the background... and that was the source of the chaos. The firm's reckless amounts of leverage had led to forced selling that quickly spread, causing the liquidation of portfolios throughout the stock market. Somehow, Chancellor had been a stock in one of those liquidations.

The value of Chancellor's business hadn't changed one bit... but folks were selling because they had to sell. And they did it with such urgency that it crushed the stock.

My memories of that vacation will always revolve around the two days spent frantically trying to figure all of this out. It was a tough experience, but it also set me on a more successful path...

It gave me a healthy respect for understanding that – in the short term – the price of a stock can have little (or nothing) to do with what's happening with the underlying company. This is something that has guided my investing principles ever since... and it's the most important advice I could give to any investor: We're buying stocks, not companies.

That time period also bears another similarity to today...

Back then, the U.S. Federal Reserve stepped in to "rescue" LTCM and prevent the company's collapse from leading to a global market meltdown.

The central bank injected liquidity into the financial system by printing money. This excess liquidity allowed the markets to make it through the LTCM period. But what happened next was the most interesting part...

You might remember the massive fear about the effect that the change in the calendar would have on the technology industry in 2000 – the "Y2K" scare.

As a result, the Fed decided to keep the liquidity spigot flowing through the start of 1999. This was when we saw the dot-com bubble "Melt Up," as Steve Sjuggerud has noted here in DailyWealth.

As I listened to Fed Chairman Jerome Powell discuss the central bank's policy recently, I thought back to this episode. With Powell stating that the Fed plans on tolerating inflation rising above 2%, this means that the central bank will likely keep up its massive stimulus measures.

We may very well look back at the COVID-19 crisis as the new LTCM crisis – just 10 times bigger. That means this period is still presenting us with fantastic opportunities on winning companies...


Enrique Abeyta

Editor's note: To take advantage of the market bubble created by our "pandemic economy," Enrique is turning the spotlight on a new opportunity. On October 8, he's hosting a special online event with a guest appearance from hedge-fund legend Bill Ackman, where they'll discuss the potential upside and explain how you could make up to 25 times your money with a single investment. Click here to reserve your spot.