The Road Less Traveled
Any student of market history can tell you about the glorious rise and fall of Cisco Systems, Inc. (CSCO) in the late 1990s / early 2000s. Over the last few years, we’ve often discussed and written about many elements from that time that seem to rhyme with the current market environment. Others see it differently and argue that the tech bubble was dominated by startup technology firms that had no earnings, and in many cases, had no sales. While it is true that many speculative companies were created during that period, it is impossible to argue that CSCO was not the king of them all. At its peak in March of 2000, CSCO was the largest company in the world valued at $556.74 billion, which represented 4.5% of the S&P 500 index. By comparison, Apple, Microsoft and Nvidia each represent approximately 6% of the S&P 500 index today.
Distinguishing itself from the Pets.com type companies of the late 1990s, CSCO experienced massive sales and earnings growth. From 1994 to 1999, CSCO grew sales by an astounding 880% (58%/year) and increased operating earnings (EBIT) by 607% (48%/year). The stellar financial performance propelled the stock from a split-adjusted $1.79/share to $53.56/share, representing a cumulative gain of 2,880%. It was an unbelievable move higher, but with that type of financial performance it was tough to argue with retail and institutional investors as they piled in. The question then, as it is now, was can the rapid growth continue. Unfortunately for CSCO investors in early 2000, it did not. The clock struck midnight in March of 2000, although it was not a complete implosion from a financial performance perspective. After continuing to rocket higher during January and February of 2000, the stock peaked on March 27, 2000, at $80.25/share, and then began a precipitous decline finishing the year at $38.25/share. That represented a 53% drop from the peak and a 28.5% decline for the calendar year. It is worth pointing out that sales jumped by an impressive 55% during 2000. However, operating income declined by a modest 5% from 1999 due to a large increase in “other expenses.” Here is a graph of the glorious rise and fall.
The chart above shows a $100,000 investment in CSCO shares on 1/1/1998. Roughly twenty-six months later, the investment grew to $863k, representing an annual growth rate of ~ 162%. Celebrations were short lived as the shares declined over the next thirty months until bottoming in October of 2002. The same investment that was worth $863k in March 2000 fell 89% to $92k in October 2002. Famously, investors who held CSCO in March 2000 and continued to hold shares to this day still have not made their money back. CSCO shares closed on March 25, 2025, at $60.99/share, 24% below the all-time high of $80.25 recorded twenty-five years earlier.
The rise and fall of CSCO twenty-five years ago is well known and has been mentioned in the financial media with increasing frequency in recent years. Despite that recognition, few investors believe that any of today’s technology behemoths could potentially suffer a 90% decline and not get back to even after more than two decades. Whether history will repeat or not, there are important lessons to be gleaned. Here are the calendar year returns for CSCO during the period shown in the graph above:
- 1998: 149.7%
- 1999: 130.8%
- 2000: (28.6%)
- 2001: (52.7%)
- 2002: (27.7%)
- CSCO was down by over 50% by October of 2002 and then rallied 44% off the bottom to finish the year down 27.7%.
There are two points that jump out at us from the return data above. First, a few consecutive down years can easily wipe out gains from a prior streak of triple digit returns. Second, 2001 was the worst single calendar year with a decline of over 52%. In a year as bad as 2001 for CSCO stock, one would expect to see the stock falling consistently throughout the year. Here are the ten worst daily returns for CSCO in 2001 and the ten best daily returns:
Based on solely the ten worst and best daily returns, the picture doesn’t look so bad. Surprisingly, the two largest absolute moves in 2001 were up days with gains of over 20% on January 3rd and October 3rd. The average of the top ten positive days also tops the negative days at 13.11% vs (10.65%). It is also worth pointing out that the very best days are tightly nestled to the very worst days (E.g. Jan 2nd (12.91%) vs. Jan 3rd 24.02%).
Clearly it wasn’t all bad for CSCO in 2001, but to produce a full year return of (52.7%) there must have been many more down days than up days, right? Wrong! Here is a breakdown of the negative and positive days:
TOTAL TRADING DAYS IN 2001 = 246
NEGATIVE DAYS = 126 (51.22%)
POSITVE DAYS = 120 (48.78%)
Not only was the average of the ten best trading days higher than the ten worst, but there were also only six more bad days than good. Bringing it all together, the absolute value of the average down day (-4.1%) during 2001 was 0.15% greater than the average up day (+3.95%). 15 basis points or 0.15% seems like a rounding error during a year where volatility is so high, but that and that alone resulted in CSCO shareholders losing over half of their investment during 2001.
What does it all mean? What lessons can we learn from CSCO investors’ plight at the turn of the century? We are reminded of the idiom “can’t see the forest for the trees,” which traces its origin back to a 16th century English playwright. It refers to the tendency of human nature to become so preoccupied with the details that the bigger picture or end goal is completely missed. We believe this is a critical message to be reinforced in a world with endless information at our fingertips and where market sentiment seems to swing wildly based on whether we’ve had a few good days or a few bad days in a row. The talking heads make it seem like investors must be agile and willing to trade in and out on almost a weekly basis to secure their financial future. Although that approach has been proven to almost always do more harm than good, human nature is a powerful thing and the fear of missing out or the fear of losing it all often overrides our better judgement.
To put it in context, think about the example above. For CSCO investors in 2001, there were 246 trees (trading days). The trees were evenly split between good trees (up days) and bad trees (down days). It is not hard to imagine an investor, who was “following the market,” as the wise investors on TV suggest, causing all sorts of problems and anxiety for himself. We can almost see the hypothetical investor rushing to dump his shares after a daily drop of over 10%, only to buy back in after a massive up day of 20% plus. It is painful to even think about investing that way as we know it is a time-tested recipe to reduce portfolio value and increase blood pressure.
We propose that there is a better way. It is simple, but not easy. It is what all the greatest investors, from Buffett to Templeton, have told us to do for decades on end, yet few listen. We must counter the natural human emotion of overreacting to short-term price moves, whether they are good or bad, with a disciplined approach of stepping back to see and understand the long-term fundamental plan. The most difficult part of this “road less traveled” approach, is that it is completely counter to what everyone else is doing. For inspiration, we look to one of the very few who has actually “beaten the market” over a period of almost four decades. The great Sir John Templeton was quoted as saying,
“It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”
As investors, we all know that we’re supposed to have a plan. We know we’re supposed to be disciplined. We know we’re supposed to buy low and sell high. We all know what we’re supposed to do. After studying the experience of investors in Cisco Systems, Inc. during the late 1990s / early 2000s, hopefully we now know why.
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Charts do not represent the performance of the firm or any of its advisory clients and are derived from sources deemed to be reliable. All information is believed to be current and should not be viewed as investment, tax or legal advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. All investments and investment strategies have the potential for profit or loss.
