In his letter to Berkshire Hathaway shareholders twenty years ago, Warren Buffett compared investors cashing in on the dot-com bubble crash to party goers at Cinderella’s ball, with a warning that remains relevant today. This according to an article in MarketWatch.
‘They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.’
The article notes, “the disconnect between the market highs and the reality of the devastated economy has never been more pronounced,” due largely to the Fed’s injection of liquidity into the system. It also points out that the so-called “Buffett Indicator” —the Wilshire 5000 Index divided by GDP—recently reached its highest level since before the 2000 bubble burst.
In the letter to shareholders, Buffett also wrote, “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs…Nothing sedates rationality like large doses of effortless money.”