1990s Tech and Internet Stock Bubble
I have always been a money nerd. In high school I was watching the market run up and people talk about technology and telecom stocks as the new tomorrow. My 62 year old grandfather had initially taught me about investing. He was nearing retirement after a long career in the late 1990s and was due two nice pensions in his future. Additionally, he had a small portfolio and just come into some money from the sale of his parents house. He was in leadership in General Electric, but decided not to stop moving with the company in his 40s when a division was sold then then put in another 10 years as an line engineer at another company in town. He had provided a solid middle to upper middle class upbringing for his four children and continued to generously support the family.
Stocks had done well and over the past few years, so he thought it was time to take some additional risk, who wants to miss out on the next big thing? Along with his “financial adviser” from a major institution (currently the 6th largest bank in the country), he decided to take a concentrated stock position in Rambus (RMBS). This company’s chip technology was supposed to be revolutionary. They purchased a bunch of stock on the way up, in he 30s, 50s, then some in the 80s and built half of his portfolio in this stock. It peaked at 115 in June of 2000, then started a rapid decline. His adviser initially said “hang in there, it will come back”. At that time and interest rates, he could have instead chosen a retirement appropriate fund (VWINX) and generated an $600-$700/mo in a conservative alternate investment.
The market’s rise didn’t just lead him to take additional risk, but he also developed recency bias with his pension selection. Since the markets had been going up for 10%+ for the last twelve years, the portfolio was going to be able to support their income needs. This led my grandparents to take both pension payments as single survivor, which was a higher payout but only as long as he lived.
In May of 2000, he came down with a brain and lung cancer diagnosis and his medical condition became far more than his portfolio. Family members didn’t quite have understand what was going on with his financial matters. His adviser also stopped returning his calls and left the big firm. It was unfortunate, they had become friends and the adviser turned into a ghost, probably out of shame for the damage that was done. By July of 2001. he was doing better and the stock was worth $8.51. The psychology was “well, I’ve already lost almost all the money, what point is it in selling it now”?
Later we were allowed full access and understanding to their finances, realizing the previous concentration of the stock position and the decision to make both of his pensions single-survivor instead of dual survivor. The medical diagnosis and distraction ended up effecting them in two ways, one by loosing touch of the concentrated position in the portfolio, and secondly changing the outlook of the pension in retirement. That stock position was eventually exited in the $5/share range and the portfolio that was left was invested in VWINX, providing a small income in addition to social security for my grandmother.
What was the damage?
My grandfather passed away after a 4+ year battle in cancer. My grandmother then lived alone independently. Later in her life, I will never forget how much she really enjoyed and wanted to be at the local CCRC (Continuing Care Retirement Community). She had spent a few months there rehabilitating from an injury and described it as “heaven on earth”. All of her friends lived there in independent apartments/townhouses/condos, had three meals prepared each day, went exercise classes, and had a daily cleaning service for their apartments. Unfortunately she (or her family at the time) did not have the financial resources for her to stay there and she lived alone less than a mile away.
This was a couple who had worked for forty years providing for their family of four children. Fear of missing out thanks to all of the news coverage of the technology stock “new economy” plus the advice of a professional adviser led them to take unnecessary risk and crush their life savings.
So how is this relevant today?
I hear stories about a TSA agent or Uber driver taking out a home equity line to buy Bitcoin. Numerous people I know with large student loan debts tell me they just “invested in bitcoin”. If this crashes, how many years of savings/work do they crush? Is all the coverage about “revolutionary technology” about to crush thousands of family’s life savings? How will these losses effect these people twenty years from now? Are all the writers pushing bitcoin considering the consequences of their actions?
At the time of this writing, Coinbase is now the most downloaded app on the iTunes Store. Only time will tell if this is a bubble and how bad it is, but today I will chose to sit on the sidelines and hope this one can avoid being devastating to others.