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Stock investors in the U.S., more than most, have a history of attaching a premium value to stocks of companies who are viewed as ‘visionaries’! Some examples in the past have included Bill Gates of Microsoft, John Chamber at Cisco and Jack Welch at General Electric. All those CEO’s took their companies to great heights, with each of them becoming the largest stock in the U.S. market at one point in their growth trajectory. The problem with these ‘hero status premium valuations’ is that when the growth slows down, which it inevitably does, then the stock suffers a double whammy from both the slowdown (or decline) in earnings and the implosion of the earnings multiples. We saw that in each of those. Microsoft fell over 75% in value from the peak in 2000 to the 2009 low, despite the fact that earnings actually increased over that period. Cisco suffered from even a sharper drop, falling by almost 90% from the tech bubble peak in 2000 to its low three years later. Even GE, despite its more stable business of selling lightbulbs and power generators, fell over 90% from its peak in 2001 to its 2009 lows, driven in large part by a failed expansion into financial services. (more…)