Echoes: How to avoid being left in freefall when a bubble bursts

Harris l Oakmark CIO, Bill Nygren, explains how fears about today’s AI-driven tech bubble compares to the dotcom era from 25 years ago, and what it teaches us about navigating market cycles with a longer-term vision.

How did you navigate the challenges presented by the dotcom bubble? What were the key decisions you made during that period?

Bill Nygren (BN): The dot-com bubble in the late 90s was pivotal. We saw companies with uncertain futures getting sky-high valuations, which as value investors didn't make sense. Our approach is to estimate what a business is worth based on future cash flows and buy only if it’s at a significant discount. Many early internet companies were too unpredictable for that.

It was tough – our largest strategy saw assets drop from $12 billion to $2 billion solely due to shareholders redeeming to buy the hot tech stocks. There was another investment firm in Chicago, a growth manager, that also capitulated late, investing in those stocks just before the bubble burst, which eventually put them out of business.

At the time, we debated whether to own any of these tech stocks. One founder said if you’re going to lose clients, better to lose them for sticking to your convictions than for chasing the market. That’s been our guiding principle for 25 years. We refuse to own what we wouldn’t buy for our own accounts.

Does this principle still guide you when it comes to thinking about evolving technologies, like AI and crypto?

BN: Absolutely. When asked about crypto, I said it could be worth anything from a fortune to basically nothing. Without conviction, we won’t expose client assets to it. The same with AI. There’s a lot of hype, and nobody really knows which players will dominate – Nvidia, Microsoft, Oracle.

History shows the biggest winners in tech revolutions aren’t infrastructure companies but those using the technology to improve how they do business. Like Walmart’s adoption of computerisation drove out Sears and Kmart, and in the Internet era Amazon and Google dominated, not AOL or Cisco.

How do you keep your conviction during market crazes, when many clients might be drawn to investing in growth equities?

BN: Fear of missing out – FOMO – is real and powerful. I remember in 2000 a cab driver recognised me from CNBC and bragged about his returns. But those speculators weren’t professionals, and they bought without understanding risk.

Over decades, we’ve learned to suppress emotions like FOMO by focusing on client needs, not market fads. Our clients entrust us with their life savings to grow capital over time for buying houses, retirement, and education. Investing in fads with uncertain outcomes conflicts with that responsibility. We could have done much better in recent years if we chased stocks like Nvidia. But we know our clients don’t want us to risk everything for a few quick gains.

How do you see the consequences of market shocks on investor behaviour today, especially for those who haven’t experienced a major event, like the Global Financial Crisis in 2008/09?

BN: Warren Buffett once said, ‘a long string of impressive numbers multiplied by a single zero always equals zero’. Many underestimate how losses hurt long-term growth. For example, doubling your money one year and then losing half might look like it earns you 25% per year, but actually leaves you back where you started.

Since 1991, there have been only six down years for the S&P 500, but in five of those years we’ve been able to protect our clients’ wealth. And managing risk this way profoundly impacts long-term returns. Younger investors who haven’t faced deep losses might be tempted to take more risk, but history shows that’s dangerous. When FOMO dominates thinking, it’s a signal to be cautious.

Would you ever take satisfaction in having been right during down markets and tell doubters ‘I told you so’?

BN: I don’t think so. Investing humbles you. We make many mistakes even sticking to what we know. There’s no hubris in success here – just gratefulness. I can enjoy being right without needing to say it.

Coming into the fourth quarter of 2025, the market feels similar to late 1999. How do you see the comparison?

BN: The situation is partly similar. People forget that the bubble in 2000 wasn’t just tech, but included growth stocks like GE and Home Depot. Today, many large-cap growth companies also have very high P/E ratios and may struggle to continue justifying those multiples. Though the dot-com era had many companies without profits and no clear path to them, some of the AI darlings today, like Nvidia, are nicely profitable and don’t look expensive if they can continue growing and maintain profit margins.

The big question is whether the current handful of large companies dominating profits can sustain that. If so, it almost bets against capitalism, which usually causes excess profit pools to be competed away over time. I prefer to believe capitalism will keep markets competitive and profits more evenly dispersed.

There seems to be a cycle in investment themes, like emerging markets, tech, then commodities. Could we be entering a new commodity super cycle?

BN: I don’t think anyone can predict. Though gold just crossed $4,000 per ounce and focus on rare earths is rising, predicting cycles is beyond us. What matters is meeting client needs over time, not chasing trend moves. Our clients are nearer their goals with steady growth rather than chasing the hottest stock or sector.

I guess some people win big betting on risky assets, but can often lose it all the next time?

BN: That’s true. People make life-changing bets, but those can also be life-changing losses. In my view, it's not a bet worth making.

How do you respond to the idea that wisdom from surviving tough periods – like the Global Financial Crisis – sometimes makes investors too risk averse, or even stifles innovation?

BN: That’s a real concern. Going through downturns teaches caution, but it’s important this doesn’t translate into avoiding all risk. Our approach is to focus on intelligent risk-taking – balancing capital preservation with the potential for strong returns. The key lesson isn’t to fear all risk, but to understand it and only take risk when compensated.

Clients today – especially those who came of age post-crisis – may never have experienced a prolonged, tough bear market. They’re more likely to underestimate the importance of risk management and compounding. For them, the temptation to take shortcuts or reach for hot assets is greater. That’s where historical lessons remain relevant: avoiding the big, permanent setbacks is foundational to long-term wealth building.

Does compounding still get overlooked by investors in favour of recent performance?

BN: Very much so. Compounding is about what you keep, not how flashy your short-term gains are. Managing downside risk – especially avoiding catastrophic loss – does more for long-term results than chasing maximum upside. At Harris l Oakmark, outperformance in down years has been a critical pillar of our long-term record.

You’ve been witnessing market fluctuations for decades. How do you decide when to stick with a conviction, adjust, or admit a mistake? And do you have any examples?

BN: The discipline is to constantly challenge assumptions. We’ve gotten some things wrong – like being overexposed to banks before the Global Financial Crisis, or underestimating Apple’s value early on. With Apple, we held a small position because we worried about explaining it as a value investment, despite its clear merits. That cost us; Apple’s gains would have offset a dozen mistakes had we sized it as an average holding.

But those experiences make you more open to seeing value in unexpected places. Since then, we didn’t hesitate to take bigger positions in similar companies, like Alphabet. It’s not about being dogmatic, but about learning, adapting and always holding yourself accountable for outcomes. Every holding is tested against new facts, not just old beliefs.

In today’s market, do traditional valuation tools still work when so much value is in intangible assets?

BN: That’s certainly a huge shift. Classic value metrics like price-to-book lose relevance when intangible assets – brands, R&D, customer lists – drive most company value. We’ve evolved to focus more on sustainable earning power and return on invested capital, including intangible assets. Buying only what looks cheap by old metrics is a recipe for mediocrity. You have to update your definitions of value or risk missing the best opportunities entirely.

There’s debate about whether active management can still add value in large, efficient markets. Where does Harris l Oakmark stand on this?

BN: Active management still adds value, especially when taking a differentiated perspective. Markets have become more short-term and index-driven, and the gaps between winners and losers are wider than ever. For value investors willing to look past market fads, lots of mispricing still exists. Our edge comes from rigorous research, patience, and a willingness to be contrarian when it benefits clients.

What’s your take on the role of share buybacks in capital allocation?

BN: When done right, buybacks are a smart way to return value to shareholders. If a company lacks high-return opportunities, repurchasing undervalued stock makes sense, provided the core business remains strong. We advocate for management teams to see buybacks as a tool – not a goal – always weighing them against all alternative uses of capital.

Given the increased popularity of ‘value ETFs’, do you worry that value investing has become commoditised?

BN: It’s definitely become more visible. But real value investing is more than buying low P/E stocks or shadowing a value factor; it’s about doing the work, understanding businesses deeply, and being willing to act when your analysis diverges from consensus. Smart ETFs can provide exposure, but they don’t replace active insight or conviction.

What advice would you give to someone starting their investment career today?

BN: I see more young professionals choosing paths with purpose – wanting to do meaningful work, not just make money. Finance can offer a deep sense of purpose when you align with a firm that truly puts clients first. Middle-class savers entrust us with their life savings; we owe them prudent, long-term stewardship so they meet their financial milestones. Too many outside the field view finance as mere self-interest, but helping families achieve security and opportunity is a noble calling.

My advice is, join organisations guided by strong ethics and client alignment. Avoid firms exploiting customers or chasing fads. Look for a culture where doing right by clients is as important as shareholder returns.

Looking forward, what’s your outlook for value investing? Has the style adapted enough to stay relevant?

BN: Value investing remains as relevant as ever, but its definition must evolve. Relying solely on book value or P/E ratios doesn’t cut it when intangible assets drive business value. We focus on identifying businesses that are both fundamentally strong and attractively priced relative to sustainable future earnings. That means assessing intangibles, management quality, and competitive advantage – quantitative screens alone aren’t enough.

The distinction between ‘value’ and ‘growth’ has blurred; we want exceptional businesses at rational prices, regardless of the sector label. That flexibility, and deep fundamental work, are what have driven our results over decades, not rigid adherence to classic definitions.

What would you say to those investors who are feeling pressured by market volatility or the temptation to pile in to trendy sectors?

BN: My message is resist the temptation to chase what’s popular or to panic in downturns. Wealth is built steadily by staying invested, by understanding what you own, and by keeping your horizon long-term. Every cycle features the next ‘can’t-miss’ idea, but discipline and patience consistently prove most valuable.

Don’t underestimate the power of compounding or the risk of large drawdowns. Drop out of the race to be ‘hottest’ – focus instead on what gets your clients or your family to their financial goals, one step at a time.

Interviewed in November 2025