It's 1999 All Over Again


  • The U.S. equity market resembles the late 1990s.
  • Growth has been prized over value since 2007.
  • Value investments are set to outperform over a multi-year period.

"A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years ... We are profoundly worried that this could be a risky allocation over the next 10." - Sanford C. Bernstein & Company Analysts (January 2017)

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” - Sir John Templeton

"Life and investing are long ballgames.” - Julian Robertson

(Source: Author’s Photo, Vintage 1999 Hat)


Time, which is our most valuable resource, has been flying by.

In August, I will turn 40, and I have been actively investing/speculating from the time I was 13, when I took my savings from a paper route that I had accumulated since I was 9, and put them into the stock market, with the help of my now deceased father.

Since 1990, there have been many cycles in the stock, bond, and commodity markets, yet as I firmly approach the hallowed threshold of middle age, with children that are approaching the age I was when I started investing, there is an eerie resemblance to the late 1990s.

Specifically, there is a dichotomy between growth and value that I never thought I would see again.

In summary, growth stocks have been prized for the past ten years, ironically ever since the 2007-2009 bear market, and today, they are at a historically overvalued level versus their value counterparts.


Value stocks are relatively cheap versus growth stocks in a historically frothy market.

Growth Stocks Leading Value Stocks in 2017 and Since 2007

After a brief resurgence in 2016, value stocks have once again been lapped by their growth counterparts.

The iShares Russell 1000 Growth ETF (NYSEARCA:IWF) is up 14.1% in 2017, while the iShares Russell 1000 Value ETF (NYSEARCA:IWD) is up 3.1% year to date.

(Source: William Travis Koldus,

Over the past decade, the out-performance of growth versus value is even more delineated in the large-cap arena, with the iShares Russell 1000 Growth ETF posting a 130.2% return, while the iShares Russell 1000 Value ETF has only returned 65.0%.

(Source: WTK,

In the smaller capitalization stocks, the story is the same, as the iShares Russell 2000 Growth ETF (NYSEARCA:IWO) has outperformed the iShares Russell 2000 Value ETF (NYSEARCA:IWN), 10.9% to -0.6% in 2017.

(Source: WTK,

The story over the last decade is the same, as the iShares Russell 2000 Growth ETF has returned 114.5%, while the iShares Russell 2000 Value ETF has gained 71.3%.

(Source: WTK,

Growth stocks were the market darlings of the 1990s, and this pushed up their valuations, while value stocks were generally out-of-favor. Value stocks had their day in the sun from 2000-07, but since then, growth stocks have once again outperformed, in a world starved for growth as the chart below illustrates.

(Source: WTK,

The end result is that we are approaching the late 1990s relative valuation discount of value stocks versus their growth counterparts.

FAANG Stocks Lead

The S&P 500 Index, as measured by the SPDR S&P 500 ETF (NYSEARCA:SPY) has had a very strong year thus far, posting a gain of 9.8% with dividends included in this performance figure.

The largest capitalization growth stocks, however, have trounced this figure year-to-date.

Facebook (FB) is up 34.8%, Apple (AAPL) is up 27.4%, Amazon (AMZN) is up 33.4%, Netflix (NFLX) is up 27.6%, Alphabet (GOOGL), (GOOG), is up 24.4%, Tesla (TSLA) is up 79.4%, NVIDIA (NVDA) is up 44.5%, and Microsoft (MSFT) is up 16.0% in 2017.

(Source: WTK,

Apple, Alphabet, Microsoft, Amazon, Johnson & Johnson (JNJ), Facebook, and Exxon Mobil (XOM), in the order they are listed, are the seven largest market capitalization companies in the S&P 500 Index as I pen this article.

With passive fund flows surging, the largest market capitalization companies are attracting a greater percentage of invested capital.

In 2016, according to Morningstar, passive strategies saw inflows of $428.7 billion, while active strategies saw outflows of $285.2 billion. This pattern of fund flows has accelerated in 2017, as fiduciary rules changes, and the outperformance of the largest equities alongside passive strategies, have combined to create an irresistible temptation for investors.

While active strategies still hold more overall assets than passive strategies, an increasing number of active strategies closely resemble index funds, so the amount of true actively managed money is very low historically, perhaps near an all-time low (in my opinion).

Building on this narrative, ETF fund flows, which are mostly allocated to passive strategies, are surging past $4 trillion in invested assets, and they are potentially on their way to $10 trillion.

Another Look at Growth Stocks Since 2007

We mentioned earlier that growth stocks have outperformed their value counterparts since 2007, and this can be seen in the following chart, which was shown in the first section that compared value and growth returns.

(Source: WTK,

The outperformance by the largest five growth stocks over the past decade, specifically Apple, Alphabet, Microsoft, Amazon, and Facebook, which are also five of the six largest stocks in the S&P 500 Index (Facebook is neck-and-neck with JNJ), is staggering, as the following chart shows.

(Source: WTK,

Amazon shares lead the pack, with gains of 1341%, Apple shares have gained 815%, Facebook shares, in a more limited time frame due to their most recent IPO, have gained 308%, Alphabet shares have gained 283%, and Microsoft shares have gained 201%, all trouncing the gains of SPY, which has risen a still very strong 97% over the past ten years.

The Takeaway - a Circular Flow of Capital Creates Opportunities

As index and ETF strategies, which are often passive, gain prominence, more and more capital flows into the largest capitalization equities. Additionally, with a majority of individual and professional investors chasing performance, due to the strength and duration of the current bull market since March 2009, the concentration of capital into the best performing equities is further accelerated.

Does this sound like the late 1990s investing landscape?

I will answer this for you, this is exactly what happened in the late 1990s, when legendary value investors like Warren Buffett of Berkshire Hathaway (BRK.B), (BRK.A), Julian Robertson, and Jeremy Grantham all materially trailed the performance of the broader market by a significant degree, and each of these acclaimed investors lost a significant number of clients and a significant number of client assets. Julian Robertson even famously closed his hedge fund.

In fact, at one point in March of 2000, Berkshire Hathaway was down roughly 50% while the NASDAQ 100 (QQQ) was up 270%.

(Source: WTK,

Building on the narrative above, due to the out-performance of the S&P 500 Index in 2017, and from 2009-2017, an increasing number of active managers have become "closet indexers," which essentially replicate the index assets while charging a higher fee.

This quote from a March 1st, 2011, article (think about how much more the situation has accelerated today), which was titled, "The Rise Of The Closet Indexers," highlights how fast active funds have re-purposed to mirror their benchmarks:

A couple of decades ago there were essentially no 'closet index' funds, says Martijn Cremers, a professor of finance at the Yale School of Management who worked with Petajisto on a previous study of this issue. But as index investing has become more popular, individual investors have become 'more benchmark aware,' he says. 'Your performance relative to the benchmark has become more salient.' As a result, investors are now quicker to bail out of funds if they fall short of their benchmark indexes, creating an incentive for managers to at least match their benchmarks -- and a disincentive to make big bets that could go wrong, Cremers says…

In summary, the end result of this circular flow of capital is that the amount of "true" actively managed money today, is much less than it has been historically. Simply put, there is real career risk in being an active manager, and being significantly different than indexes. And, when everyone is crowded in the same trades, in the same stocks, perhaps that is the time to be different?

To close, I know my answer to this open-ended question, and I will let readers follow the logic and their brains to get to their answer.

The investment landscape is changing, and if you are interested in joining a unique community of contrarian, value investors, and would like to see all of the historical trades and current positioning of the "Bet The Farm" and the "Best Ideas" Portfolios, please consider signing up for my premium research service, "The Contrarian." This service has been well reviewed by its members, and I believe we are once again at a unique inflection point in the financial markets, for the third time in the past two decades.

The wide dispersion of returns in 2017 has created a second chance opportunity, in my opinion, and I am discussing this potential opportunity at the upcoming DIY Investor Summit. If you are interested in hearing a portion of my thoughts alongside eight other respected market analysts, please explore the DIY Investor Summit.

Disclaimer: Every investor's situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

This article was written by

KCI Research Ltd. profile picture
Author of The Contrarian
"Against the grain" investing backed by real-world wisdom and experience
Founder of "The Contrarian", a premium research service, featuring a committed, collegial group that has uncovered a number of hidden gems, hidden in plain sight.  Immensely proud of what our members have accomplished.  Actively investing since 1995, I have soared like an eagle, and been unmercifully humbled by the markets. Achieved positive returns in 2008, and turned an account with $60,310 on 1/1/2009 into an account with $3,177,937 on 11/30/2009. My best years have been 1995-2003, 2008-2012, 2016, 2020, & 2021. My worst years were 2013-2015 & 2017-2019. I believe inflation is coming, and we are at an inflection point in the markets.

Twenty plus year career as an investment analyst, investor, portfolio manager, consultant, and writer. Founder of Koldus Contrarian Investments, Ltd, which was incorporated in the spring of 2009. Dyed in the wool contrarian investor, who has learned, the hard way, that a good contrarian is only contrarian 20% of the time, but being right at key inflection points is the key to meaningful wealth creation in the markets. I believe we are near a meaningful inflection point, perhaps the biggest one yet, for the third time in the past 15 years.

Historically, I have had huge wins and impressive losses based on a concentrated, contrarian strategy. Trying to keep the good while filtering out the bad.

Seeking to run an all weather portfolio with minimal volatility and index overlays to capture my strategic and tactical recommendations along with a concentrated best ideas portfolio, which is my bread and butter, but the volatility only makes it suitable for a small piece of an investor's overall portfolio. The following are a couple of my favorite investment quotes.

"Life and investing are long ballgames." Julian Robertson

"A diamond is a chunk of coal that is made good under pressure."

Henry Kissinger

"Knowledge is limited. Imagination encircles the world." Albert Einstein

I’ve been on top of the world, and the world has been on top of me. I have learned to enjoy the perspective from each view, and use opportunities to persistently acquire knowledge, and enjoy the company of those around me, especially loved ones, family, and friends.

At heart, I am a market historian with an unrivaled passion for the capital markets. I have had a long history and specialization with concentrated positions and options trading. Made money in 2008 with a net long portfolio, deploying capital in some of the market's darkest hours into long positions including purchases of American Express, Atlas Energy, Crosstex, First Industrial Real Estate, General Growth Properties, Genworth, Macquarie Infrastructure, Ruth Chris Steakhouse, and Vornado near their lows. Shorting, hedging, and option strategies also helped me in 2007 and 2009, and these are skills that I have developed ever since I started trading heavily in 1996.I enjoy reading, accumulating knowledge, and putting this knowledge to work in the active capital markets, learning lessons along the way.To this day, I continue to learn, and some of these learning lessons have been excruciatingly difficult ones, especially over the past several years, as I made mistakes allocating capital, including a sizable portion of my own capital (I always invest alongside my clients), to commodity related stocks. While all commodity related stocks have struggled since April of 2011, coal companies, which attracted me due to their extremely cheap valuations, and out-of-favor status (I am a strong believer in behavioral finance alongside fundamentals and technicals) have been the worst investing mistake of my career. The focus on the commodity arena has been the biggest mistake of my investment career thus far, yet in its aftermath, I see tremendous opportunity, even larger in scope than the fortuitous 2008/2009 environment.The capital that I accumulated and the confidence gained in navigating the treacherous investment waters of 2008 gave me the confidence to launch my own investment firm in the spring of 2009, right before the ultimate lows in the stock market. At the time I was working as a senior analyst at one of the largest RIA's in the country, and I felt strongly that the market environment was the best time since 1974/1975 to start an investment firm.

Prior to starting my firm, I was a senior analyst for three different firms over approximately 10 years (Charles Schwab, Redwood, Oxford), moving up in responsibility and scope at each stop along my journey. Since I was a paperboy, I have always had an interest in the investment markets. I love researching and finding opportunities. I was a Chartered Financial Analyst, CFA from 2006-2018. Additionally, I have been a Chartered Alternative Investment Analyst, CAIA. After starting in the teaching program at Ball State University, I switched to a career in finance when I turned a small student loan into a substantial amount of capital. I graduated summa cum laude with a degree in finance from Ball State.

Full disclosure, I am not currently a registered investment advisor, though I did serve in this capacity from 2009-2014, while owning Koldus Contrarian Investments, Ltd. Additionally, I held various securities licenses from 2000-2014 without a single formal complaint filed. At the end of 2014, I voluntarily let my state registration expire, as I transitioned the business to a different structure after going through a brutal business environment, divestiture and difficult divorce and custody battle. Prior to this, I had passed, and held, various securities exams and licenses, including the Series 7, Series 63, and Series 65 exams, in addition to others, alongside the CFA and CAIA designations. Unfortunately, I did not file the proper paperwork to withdraw my state registration, and I did not disclose a personal arrangement, and subsequent civil case, between myself and a former close personal friend and client. This arrangement was initiated informally in 2011, after a substantial period of success, as we aimed to be business partners, and it ultimately resulted in a dispute. I was unaware that I was required to disclose these items, and my securities attorney, at the time, did not advise me to do so. Previously, I had managed a portfolio for this gentleman, and we had taken an investment of approximately $7 million in 2009, and grown it to over $25 million at the beginning of 2012. After a very difficult year of performance, an employee of the firm I owned, and friend, resigned in early 2013, and took the aforementioned client to a competing firm. As a result of not filing the proper paperwork, I agreed to a settlement, with a potential $2500 fine in the future, depending on if I choose to reapply to be a non-exempt advisor. Additionally, while going through the difficult divorce and business dispute and divestiture, I did not file the proper disclosure on two of the annual CFA renewals. As a result, the CFA Institute sought a 3-Year Suspension of my right to use the CFA designation, which I appealed, since the primary investigator in the case sought a 1-year suspension of my right to use the CFA designation for a majority of the investigation. A Hearing Panel heard the case, and went against the recommendation of the CFA's Institute's Professional Conduct Department. Long story short, be careful who you trust, especially when substantial money is involved, and always disclose everything properly, which is hard to do when you are going through difficult situations, as this is the last thing you are probably thinking of at the time. In closing, I have had more experience in the markets, business, and life than most, yet I am grateful & thankful for every day. Additionally, I have learned through success and failures that you have to move forward, and if you can do this, your life will form a rich tapestry of stories.

Disclosure: I am/we are short SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (317)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.