Conventional wisdom is rarely a fickle thing. It often takes generations to upend the most fundamental ways of looking at our world, which makes what is going on right now so interesting. The rise of terrorism, quantum mechanics, and complexity theory, to name a few, are changing the way we look at our place in the world, the makeup of our universe, and the way markets and organizations behave. But if you’re skeptical that these new ways of looking at the world might not actually pan out, you need look no further than the turn of the millennium, when two similar events in sports and finance came out of nowhere to threaten widely-held beliefs about how to succeed in football and in the stock market, before vanishing just as quickly.
The late 1990s is often characterized by Alan Greenspan’s phrase “irrational exuberance,” but for the people who were making boocoos of money, riding the incredible tech wave was a perfectly rational thing to do. To many in the financial community, the late 1990s represented a paradigm shift, in which high price-to-earnings ratios and idealistic business plans were no barrier to funding for a business.
Also in the late 1990s, the idea of a strong defense being the key to securing a championship took a big hit. The 1999-2000 St. Louis Rams won the title with an ungodly offense featuring Kurt Warner, Marshall Faulk, Isaac Bruce, and Tory Holt, and a fairly pedestrian, by Super Bowl standards, defense. Compared with previous champions, they seemed less concerned with stopping their opponents than with slinging the ball down the field.
The common denominator here is fundamentals. In sports, a lot of what we see on the field can be described as tactics, the small moves within a contest that move the action along step-by-step, and strategy, each team’s longer-term plan for success. Underlying both of those are fundamentals, which are the aspects of competition widely believed to be integral to success irrespective of the strategy and tactics employed. “Blocking and tackling,” an idiom that has actually crossed over into business, represents the basics that no team can do without. And before 1998, a football team with a less-than-exceptional defense and a turnover-prone offensive philosophy was looked upon as critically as a business that sold a product (or service) for less than it cost to make (or deliver) it.
In the stock market, “fundamentals” refers to the performance measures, such as cash flow and earnings growth, that are common to all companies. One particular statistic, the price-to-earnings ratio, is a common measure of value, reflecting both the price of a stock and its fundamentals (earnings per share). In the late 1990s through early 2000, P/E ratios became inflated, a function of two factors: 1) companies sacrificing earnings in favor of increased market share and revenue growth and 2) investors willing to pay more for a company’s earnings based on the assumption that technology companies would grow very rapidly. The tech boom did not mean a departure from fundamentals per se, but it caused many to believe that traditional fundamentals were insufficient for predicting success in the internet era.
Between September 12, 1999 and January 30, 2000, the NASDAQ composite average jumped 35%, and during that same time the Greatest Show on Turf was busy setting the NFL on fire. A common perception of NFL champions is that they play hard-nosed defense, with a balanced offensive attack that tends toward ball control and getting everyone involved. The four quintessential champions of the NFL’s first four decades, the Packers of the 60s, the Steelers of the 70s, the 49ers of the 80s, and the Cowboys of the 90s, featured dominant defenses and balanced offensive attacks. The 1999 Rams defense, though it was better than average, was by no means dominant, and it ranked 24th in passing yards allowed. And though Marshall Faulk rushed for 1381 yards, he also had over 1000 receiving yards in an offense that will definitely be remembered for making a star out of formerly unknown quarterback Kurt Warner.
The Rams’ meteoric rise was mirrored in the rising stock market, and like the tech bubble, their success was relatively short-lived. Their offense had a couple more great years resulting in one more Super Bowl appearance before they fell from contention. Oddly, the only lasting aspect of the Rams’ run is the expectation that teams will rise and fall quickly. The salary cap has enabled teams to experience quick turnarounds similar to those of the Rams, as has been demonstrated by numerous Super Bowl teams since 2000.
Why was the Rams’ philosophy itself not sustainable? One reason is that (similar to the amoeba defense that UNLV basketball employed) it combined a difficult-to-execute strategy with a group of phenomenal athletes at the top of their game who were able to overcome the holes that inevitably show up when the same system is executed by mere mortals. Marc Bulger, Warner’s successor, put up some huge numbers, but the Rams never again caught lightning in a bottle like they did in 1999-2000, and high numbers of turnovers and defensive lapses became the norm.
Super Bowl XXXIV was referred to as the Dot Com Super Bowl because of the numerous commercials for internet companies that would find themselves out of business a year later. Their was a dot com on the field as well, and whether you were paying closer attention to the Super Bowl or the stock market in January of 2000, you would be taught the same lesson: for sustained success, fundamentals cannot be ignored, “paradigm shift” or no.