On Bubble Watch

Summary

• Exactly 25 years ago, the author published a memo titled "bubble.com" regarding irrational behavior in tech, internet, and e-commerce stocks, which proved correct quickly.
• The author identifies two major bubbles in the current century: the tech-media-telecom bubble of the late 1990s that burst in mid-2000, and the housing bubble of the mid-2000s involving sub-prime mortgages.
• The seven top stocks in the S&P 500, known as the "Magnificent Seven," are Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta, and Tesla.
• At the end of October, the market capitalization of these seven stocks represented 32-33% of the S&P 500's total capitalization, roughly double their share five years prior.
• The highest share for the top seven stocks in the previous 28 years was roughly 22% in 2000 during the height of the TMT bubble.
• At the end of November, U.S. stocks represented over 70% of the MSCI World Index, the highest percentage since 1970.
• The author defines a bubble as a temporary mania characterized by irrational exuberance, adoration of assets, fear of missing out, and the conviction that there is no price too high.
• The author outlines three stages of a bull market: the first where only a few see improvement, the second where most accept improvement is occurring, and the third where everyone believes things can only get better forever.
• Bubbles are often associated with new developments where the phrase "this time is different" prevents investors from using historical valuation metrics as a tether.
• In the late 1960s, the "Nifty Fifty" stocks were considered so good that investors believed nothing bad could happen, leading to a bubble where prices fell from P/E ratios of 60-90 to 6-9.
• Investors who bought Nifty Fifty stocks in September 1969 and held them for five years lost well over 90% of their money.
• The author's guiding principles include the belief that it is what you pay that counts, not what you buy, and that no asset is so good it cannot become overpriced.
• The internet bubble of the late 1990s saw e-commerce stocks triple on their first day, yet the vast majority of those companies ended up worthless.
• The author notes that while the internet did change the world, the mania surrounding it resulted in losses of 99% for many stocks after the bubble burst.