It's Not a Bubble... Until It Is

It has been 25 years since 'bubble.com'...

And Howard Marks is speaking out yet again.

Regular readers know Marks is a powerful voice in the credit market. His predictions and analyses are so spot-on, even Warren Buffett drops what he's doing to tune in.

And back in January 2000, Marks predicted the dot-com bubble... in a memo aptly titled "bubble.com."

Marks noticed the price charts of many dot-com stocks matched what happened during famous bubbles, such as the South Sea bubble in the early 1700s and the radio stock bubble of the Roaring '20s.

He called it out as an unprecedented tech rally... one that couldn't last forever.

Two and a half decades later, Marks is back with his latest memo, called "On Bubble Watch." As the title suggests, it's tough to call today's market one way or the other.

That said, Marks' memo offers plenty of wisdom for how you should think about investment cycles.

It doesn't really matter if we're in a bubble or not...

Marks explains that a bubble is more a state of mind than a calculation. It stems from emotional reactions like irrational exuberance... the belief that companies "cannot miss"... the fear of missing out ("FOMO")... and the notion that no price is too high.

The market certainly meets some of these criteria today. The S&P 500 is sitting at a 25 times Uniform price-to-earnings (P/E) ratio. The average for this kind of tax and inflation environment should be about 20 times.

Said another way, market average valuations are far higher than they should be.

Bubbles don't burst without a reason, though. And since the credit market has cleared up and companies are growing earnings, there's not much reason for the market to panic. At least, not for the moment.

As long as those two things are true, we could remain on bubble watch for months... or longer.

In a market like this, it's harmful to label yourself as one 'type' of investor...

You shouldn't restrict your approach to any one style, like value investing or growth investing.

Instead, you need to be flexible and adjust your investment style based on the market's conditions.

For example, plenty of so-called experts claim traditional value investing – buying stocks that are trading at a discount – has been dead for years.

It's true that this approach has struggled recently. The high-growth, high-valuation "Magnificent Seven" have been responsible for most of the market rally. And if you haven't owned any of the Mag Seven in the past few years, you've likely underperformed the market.

When bubbles burst, though, these types of high-growth stocks aren't the best place for your money.

Back in the "bubble.com" days, tech hardware company Cisco Systems (CSCO) was the hottest stock in the market. But as the bubble burst over the next three years, shares fell 72%.

If you refused to be flexible with your investing approach... you'd have watched your money evaporate.

Market conditions could change fast this year...

So it's important to understand your options.

To that end, we're hosting the second lesson in our latest two-part Master Class tonight at 6 p.m. Eastern time. It's called, "Why Bruce Lee Would Have Been Great in Finance."

(And yes, we're talking about that Bruce Lee... the actor and martial artist.)

We'll cover a number of investing strategies during the lesson. And we'll explain which to use based on the market environment.

These Master Class lessons are free for Altimeter Pro subscribers. Be sure to check your e-mail for your exclusive link.

And if you're interested in signing up, you can do so at a special discounted rate right here.

Markets can change fast... and while growth is working well today, it's not guaranteed to work tomorrow.

Make sure your portfolio is prepared for anything.

Regards,

Joel Litman
January 23, 2025