Flying out to California on New Year’s Eve this past year, I came across a movie called The Big Short. It was made in 2015 and pulls off the challenging task of depicting a complex financial meltdown brought about by a largely unsympathetic cast of characters. Creative storytelling and editing keep the audience from getting overwhelmed by jargon — Margot Robbie’s cameo being the best known example.
The chain of events that caused Lehman Brothers and Bear Sterns to wink out of existing could have happened at any time. It was brought about by dishonesty, fraud, and fear. However, the nexus of subprime risk and the so-called “housing bubble” in the US and Europe predated those events by at least six years.
This brings us to the question of whether we are in a stock bubble right now. Let’s just say that after a brief downturn at the beginning of the year, we’ve been seeing new index records almost daily. Problem is, most of those gains have been concentrated in just seven stocks. Seems like classic lemming behavior to me.
It is very striking to me that with one exception (NVDA, the AI darling) all of the Magnificent Seven are household names. Seems like classic lemming behavior to me. Come on — do people really think that META is going to innovate its way into massive new arenas for growth? The stock is popular because people know who Mark Zuckerberg is and have a Facebook account somewhere that they may or may not check. Ditto with Elon Musk and TSLA.
Problem is, popularity is not quite the same as value. Things like quarterly returns and EPS actually do bear some casual and glancing relationship to stocks’ long-term performance. I would not necessarily encourage casual investors to abandon index funds — but they may want to take a careful look at the relative proportions of holdings. With that said, if you are investing funds you can afford to lose, there is plenty of opportunity in the short term.