Be kinde to folk. This changeth the whole habitat.
- Manlobbi
Halls of Shrewd'm / US Policy
No. of Recommendations: 12
Gift link from the Wall Street Journal:
https://www.wsj.com/finance/stocks/the-eerie-paral... Is it karma? Coincidence? Either way, the ghost of the dot-com bubble is back 25 years later.
Shares in Cisco Systems CSCO -1.85%decrease; red down pointing triangle, the dot-com-era champion that became the world’s most valuable company at its peak in March 2000, this week reached that level again for the first time. It’s a cautionary tale of how far stock prices can depart from reality.
Bulls spend a lot of time denying that there’s a 1990s-style bubble inflating again in artificial intelligence. But it’s worth going through a few of the striking similarities, and some notable differences.
Valuation
There are lots of ways of valuing stocks, and pretty much all of them make U.S. shares look the most expensive since the dot-com bubble. The forward price-to-earnings ratio, price to cash flow, the “Fed model” calculation of the extra reward offered by stocks compared with bonds and the cyclically adjusted PE ratio all scream that stocks are expensive.
[From later in the article (for those who don’t read all of it)]
Single-minded market
In 1999, more stocks in the S&P 500 fell than rose. So far this year, 183, or 37%, of them are down. Anything AI-related—chip makers, power generators, producers of equipment used to build data centers—is up, and much of the rest of the market is down.
In 1999 if you were an internet stock, you boomed, and if you weren’t, no one was interested. Much the same applies today to AI.
No. of Recommendations: 3
OT: But I started a thread on the Index Investing board to track (in real time) thoughts on the "AI Bubble" - feel free to contribute. Would be interested to read back in a few years...
tecmo
...
No. of Recommendations: 36
A bubble is a terrible thing to waste. There is a lot of money to be made on the way up (something I'm happy to sit out), but also a lot of money to be made on the way down. I think I was probably one of the larger individual holders of BEARX 2000-2002 : )
I've been thinking of starting a thread about how best to make a few bucks if markets behave unpleasantly in the next (say) 2-3 years. Say, allocating 1.5% of my portfolio to an asymmetrical bet: heads I win a lot, tails I don't lose much. It's hard to say where the worst pain will be, AI exuberance or private credit.
It's way off topic here, but there are some fairly insightful folks here. Also on the Falling Knives board, but it is thinly populated.
Jim
No. of Recommendations: 1
Jim, do you still like BEARX as a vehicle? It looks like the same managers have been in place for quite a while. Returns seem to approximate the inverse of the S&P 500. If it is a one-stop shop that captures most of a market decline why do anything more complicated?
No. of Recommendations: 1
As an option / idea, I'm increasing an allocation to Cliff Asness' AQR QLENX, a long-short fund with 40% cash. As are some others I lurk behind on early-retirement.org.
FC
No. of Recommendations: 8
Jim, do you still like BEARX as a vehicle? It looks like the same managers have been in place for quite a while. Returns seem to approximate the inverse of the S&P 500. If it is a one-stop shop that captures most of a market decline why do anything more complicated?
Not really.
Different manager from back then, different owner, higher fees, and (a killer for me) it is now forbidden for a non-US person to own a US mutual fund. As a result I haven't even looked all that closely in a few years.
Back in the day, they were quite good at getting returns that were just a bit better (through up and down) than the inverse of the S&P. Last I checked (a long time ago), they hadn't managed that result in quite a while.
Jim
No. of Recommendations: 10
"A bubble is a terrible thing to waste. There is a lot of money to be made on the way up (something I'm happy to sit out), but also a lot of money to be made on the way down. I think I was probably one of the larger individual holders of BEARX 2000-2002 : )
I've been thinking of starting a thread about how best to make a few bucks if markets behave unpleasantly in the next (say) 2-3 years. Say, allocating 1.5% of my portfolio to an asymmetrical bet: heads I win a lot, tails I don't lose much. It's hard to say where the worst pain will be, AI exuberance or private credit.
It's way off topic here, but there are some fairly insightful folks here. Also on the Falling Knives board, but it is thinly populated.
Jim"
Some months ago American Bitcoin (Trump sons crypto firm) made an IPO.
The business plan was "trading bitcoin".
It was pretty obvious that this stock in the next bear market will be probably zero.
So the first day insider could sell their shares, the stock went down more than 50%.
John Templeton had a strategy of shorting internet stocks, when insider were allowed to sell.
American Bitcoin was the same.
No. of Recommendations: 3
In 1999 if you were an internet stock, you boomed, and if you weren’t, no one was interested. Much the same applies today to AI.
For me it's been harder to find value than in 1999, when general disdain for "old economy" stocks meant that a lot of them got left for dead. Back then I remember buying small moaty industrials with ROEs in the 20s at 10x real earnings. Now they're at a P/E of 20. I'm not saying there are no value opportunities in the U.S. market, it just feels like the whole market is bloated, across sectors (real estate and construction possibly excepted). International -- the UK, Europe generally, eastern Europe in particular -- seem to be target-richer environments for value, with the additional advantage that you can avoid or distribute some of the risks that come with the, um, new regime in the U.S.
No. of Recommendations: 2
or me it's been harder to find value than in 1999, when general disdain for "old economy" stocks meant that a lot of them got left for dead. Back then I remember buying small moaty industrials with ROEs in the 20s at 10x real earnings. Now they're at a P/E of 20.https://www.shrewdm.com/MB?pid=725634688This was discussed on the Index board (link above). PE for RSP (Equal Weight) is around 17, vs 23 for SP500. If you look hard there are some opportunities on the buy side still. I recently got bullish on LULU and have been posting on the Falling Knives board my thoughts.
tecmo
...
No. of Recommendations: 11
Agree with the sentiment of this thread. When it comes to old economy names, one thing rings loudly, a small tidbit in the Berkshire annual letter;
“53% of our subsidiaries had declining earnings.”
That was for 2024, relative to 2023. Wonder what happened to them in 2025? The implication of this likely explains best the zippered wallet at Omaha.
No. of Recommendations: 2
I've been thinking of starting a thread about how best to make a few bucks if markets behave unpleasantly in the next (say) 2-3 years. Say, allocating 1.5% of my portfolio to an asymmetrical bet: heads I win a lot, tails I don't lose much. It's hard to say where the worst pain will be, AI exuberance or private credit.
I like the asymmetrical bet idea. What about:
SPXS: 3X inverse S&P 500
SQQQ: 3X inverse Nasdaq 100
If those indexes fall 10% you gain 30%. Fall 20% you gain 60%. Fall 30% you gain 90%.
Actually, that doesn't seem that lucrative.
No. of Recommendations: 2
The leveraged inverses will kill you if the stock whipsaws up and down.
Jeff
No. of Recommendations: 3
In 1999 if you were an internet stock, you boomed, and if you weren’t, no one was interested. Much the same applies today to AI.
In 1999, I traded in about 40% of my dot.com winnings for an adviser who bought REITS and brick and mortar and BRK and a bunch of old-school stuff. My timing couldn't have been much better, while my tech winning were significantly bruised in 2000, the portfolio JoeJoeBubbaJr bought me was up like 25% in 2000. I was happy.
If AI is a bubble and taking all the oxygen (or money anyway) away from all the good businesses, what are the bargains today? What should be in your anti-Bubble ETF?
R:?
No. of Recommendations: 3
yup.. 1999 traded my internets for BRKB...then in (really ) march 2003 sold some BRKB and back into semicons. been trading my flyers for brkb for 20 years now. slow and steady, and unless the dollar and or market totally collapses, should see me out with a bit left over for the donations , siblings and their kids.
No. of Recommendations: 3
If those indexes fall 10% you gain 30%. Fall 20% you gain 60%. Fall 30% you gain 90%.
I don't think those funds work this way. They work more like the following -
* You buy the fund, let's say $1000
* A month goes by, no big drop, no big gain, now you have $970 in the fund
* Another month goes by, same, now you have $941 in the fund
* Another month goes by, market up 4.5%, now you have $900 in the fund
* Ten months go by, market up 9%, now you have $630 in the fund
* Next month, market drops by 5%, now you have $700
* Next month, market drops another 5%, now you have $800 in the fund
Etc.
No. of Recommendations: 5
I don't think those funds work this way. They work more like the following -
* You buy the fund, let's say $1000
* A month goes by, no big drop, no big gain, now you have $970 in the fund…
If the market stays the same, the fund loses you nothing - that’s not the problem. The real problem is that these leveraged funds take advantage of some mathematics that virtually guarantee losses, over any time reasonably long time period (like more than a month or two).
Here’s how it works:
With a non-leveraged fund that goes up a little and down a little, but basically stays even, this means that the days when there is a loss (say from $100 to $98, i.e. down 2%) are counterbalanced by days when it is up $2 from $98 to $100, i.e. up 2/98=2.04082%) But if you multiply those percentage changes by 3, you get a loss of 6% on one day ($100 goes to $94) and a gain of 6.12245% on the up day ($94 goes to $94*1.0612245=$99.755102.
As one can see from this example, an equal loss and gain that would have balanced out in an unleveraged investment can leave you well behind (a quarter of a percent in this example) after just two days. Theay’s a small loss, and it would be even smaller for smaller moves down and back to the starting point, (or the same thing in the reverse order), but there will always be a loss, and over time, those losses will be large, eventually (over several years) potentially losing you your whole investment.
If you look at how these investments have done in recent years. the typical answer is, remarkably well. That is because the last few years have seen very strong gains, and leveraging these gains has more than made up for the slippage described above. But in most markets, i.e. in periods where there are no strong consistent gains in the overall market, they will perform poorly.
If you want leverage (although the most sage advice is to avoid leverage), options are almost certainly a more economical way of obtaining it.
