5 Lessons from Nasdaq 5k (Plus markets, cash, Sonic vs Shake Shack and more)

Lots of our stocks are near their all-time highs. Others that we’ve nibbled on recently are up 15%, 20% or more so far this year. The stock markets are at all-time highs and we’re looking back at the last time the Nasdaq hit 5k in today’s report.

Do I think the stock market is likely headed higher still? Yes. But the risk/reward of being aggressively net long back in 2010 or 2011 when the Nasdaq was less than half its current quote, was better. So just remember this:

Wise words (and thanks for putting me in the flattering company of Warren Buffett), @Raymond.Hart: “@CodyWillard one take away from your book and Berkshire Hathaway BRK’s annual letter, for me, is the importance of having enough cash in your portfolio. Gonna keep that in mind.”

Barnes & Nobel $BKS is down a couple bucks from its recent intraday highs when we added to our short position in that name. Earnings coming up in a couple weeks and that might be a good catalyst to crack it down, so stay tuned.

A couple other notes first.

$SONC and $SHAK have about the same valuation, but Sonic has 3000 restaurants vs Shake Shack’s 65. Sonic ain’t a “cheap” stock either and is priced as a growth stock too. Speaks to the profitability of the Shake Shack model and a market that’s bubbled up in search of growth. Doesn’t mean the markets,$SONC and/or $SHAK can’t go higher tho.

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And here’s today’s report.

Where were you the last time the Nasdaq hit 5k?

I was working for Visual Radio, a tech incubator that invested in and/or created new technology companies. Visual Radio was a classic example of the dot com bubble — the founder of the company had sold Prism, a start-up DSL company for about a hundred million dollars to Comdisco which was worth billions of dollars.

You might remember Prism’s super blow in 1999 that showed a dashboard with a speedometer going 60 MPH as the announcer said something like, “This is your dial up Internet.” And then the speedometer starts spinning as the scenery blurs by and he says, “And this is your Prism DSL Internet.” Prism got millions of calls from consumers wanting faster broadband. Problem was, Prism was still in start up mode and only ready to service something like a few tens of thousands of people.

Comdisco had been a wonderful success story for decades and was in the data back up and storage business and the fumbled badly as they spent all their cash and took out vendor-financed loans from telecom providers like Nortel, Lucent, Alcatel, Cisco and others to try to scale up to meet the demand that those commercials was creating for Prism’s DSL services. Nortel and the telecom equipment vendors were recognizing much of that vendor-financed sales as high margin revenues and the stock markets were valuing anything with the words “communications” or “dot-com” or “Internet” with insane multiples.

In house, Visual Radio spent much of those millions they’d raised on glamorous pent house offices in the hip Meatpacking industry as the start up incubator, without a single revenue source or near-term exit strategy, went from 10 to 75 employees in the first year — of course most of the executives were family members or best friends of the guy who founded the incubator.

Meanwhile, in 1999 as the Nasdaq was completing its 300% spike from its 1996 lows when Federal Reserve Chairman Alan Greenspan had warned about “irrational exuberance,” the Fed was lowering interest rates despite record earnings for corporate America and its banks. Artificially low rates, down to an unheard of 1%, was the Fed’s answer to address fear that the networks might seize up and the markets might tank when the calendar turned over from 1999 to 2000, since a lot of the world’s popular software were designed for only two digits in the year column, and would break down when they would turn past “99” as in 1999.

And that Y2K issue was itself responsible for a huge wave of spending as the world bought new PCs, mainframes, servers and software to prepare for the turning of the millennium.

But investors rightly recognized some of the society-altering, economy-creating, productivity enhancing ramifications of enablign the entire world to meet, shop, communicate and trade online. Pets.com, Webvan, and hundreds of other companies with no profits, little revenues and big dreams were actually going public to the tunes of billions. K-Tel, the infomercial music compilation company announced they were going to start selling their CDs and cassettes on their website and the stock tripled in a week. When Visual Radio gave out options to their employees, there was talk in the halls wondering when Visual Radio might itself go public.

Just two years later, Visual Radio was out of business and Comdisco went bankrupt, long before the company was ever able to deliver DSL services to even a tiny fraction of the demand they had. Pets.com, Webvan and many of the other high-flying billion dollar dot com/communication/Internet businesses had neglected to sell more shares to prepare for bad times.

Here are my five personal lessons from this analysis and look back:

1. Sell when we can, not when we have to. GoPro comes to mind here these days, with its failure to sell any of its own shares to stack its balance sheet when the company was double its current quote and they sold some of their own shares.

2. Cycles change in a hurry. The energy sector is the most recent example of this lesson. Remember the last few years when people were worried about the “peak oil theory” and $200 oil? It took but six months for the whole sector to crash.

3. Winners take all. Hundreds of publicly companies from the tech, Internet, communication, and dot com industries failed. But Oracle, Amazon, eBay, Apple, Google, and others that hit the critical mass to become winners are worth trillions of dollars in combined valuation to this day.

4. Bubbles are as bubbles do. Cycles change in a hurry and when the up part of that cycle became a full on bubble, the crash will be just as extreme. Are we in a tech bubble right now? Not in the same outrageous way we were in a bubble in 2000.

5. Technology is revolutionizing our world. Most folks miss in any economics discussion is the huge productivity and wealth gains from apps, Internet, PCs, spreadsheets, free communications, social networks and so on bring to the global economy. It’s a wonderful thing and probably having a much huger impact than anybody realizes.