Why Warren Buffett was right to caution investors
One of the visionaries in the room were not happy to hear Warren Buffett arrive in Sun Valley, Idaho, with an unpopular warning.
The tech leaders there were determined to change the world and had already made fortunes doing it.
In a year where some tech stocks were as much as 27 fold, many were sitting on investments with sky-high valuations that they felt fine about.
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There were polite nods as Buffett took his place behind the lectern.
Buffett warned the crowd that they were expecting too much in the long term. He pointed out some periods in recent U.S. history in which America's economy had doubled, tripled or even quntupled in value - yet the stock market went nowhere because it had already been so overpriced to begin with.
Buffett acknowledged the white-hot performance of the market in recent years. This should make investors cautious. He warned that reality would catch up to lofty valuations over time.
In late 1999, Buffett was right to preach caution. The collapse of the dot.com bubble, one that would send the Nasdaq Stock Market plunging as much as 75% and seeing household names like Apple Inc. AAPL and Amazon.com Inc., AMZN shed over 80% of their market capitalizations, was just a few months away.
Bill Gates, Microsoft Corp.'s friend Buffett was in the audience that day. The share price of Microsoft would plunge 34% in less than a year, and it would take 14 years for the company's shares to return to 1999 levels.
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Andy Grove, the founder of Intel Corp. INTC, was also in the crowd. He would see his company do worse. Intel returned 24% over the next 17 years, half of the S&P 500's 58% gain.
More than two years ago, Charlie Munger, Buffett's partner at Berkshire Hathaway Inc., warned investors that they were very near the edge of playing with fire. The stock market turn over the last year has validated that view. The S&P 500 has plunged over 22%, ending a historic 14 year bull market. In nosedives similar to what tech giants like Tesla Inc., Apple, Amazon, and Meta Platforms Inc. suffered in 2000 and 2001, tech giants like Tesla Inc., have lost trillions of dollars in market value.
Funding for startups has collapsed 23% globally over the last year, and it is not just publicly traded companies. There has been a turn in market sentiment.
The investors are no longer euphoric and driven by the fear of missing out. They were rattled after a yearlong market downturn. This calls for more words of wisdom from Buffett: be greedy when others are fearful.
It is worth noting that the tech stocks hurt the most in the last great tech selloff rebounded by over 2,000% each in the years ahead. It's possible that investors are faced with a similar opportunity today.
With the help of equity crowdfunding, investors looking to profit from an eventual rebound have a weapon in their arsenal they didn't have in 2001.
StartEngine is an equity crowdfunding giant that allows regular investors to claim stakes in some of the most exciting, if risky companies in the world. It recently inked a deal with another crowdfunder Indiegogo to bring the latter's network of 800,000 investors to StartEngine's equity crowdfunding platform.
See more startups investing from Benzinga.