“Irrational Exuberance” or “Stupidity”?
One final measure of bubbliness is behavior. As Jeremy Grantham of GMO put it, when he warned that stock markets were in a new “bona fide” bubble, “crazy” behavior is the best indicator that a climax is approaching. There is plenty of bonkers behavior around. Some of it crosses the line from “irrational exuberance” (taking a good idea way too far) into stupidity.
Exhibit a) is Signal Advance Inc., whose shares rocketed in January after Elon Musk tweeted a recommendation to switch to Signal, an unrelated communications app. That case of mistaken identity was cleared up a month ago. But anyone who happened to hold Signal Advance at the beginning of the year, before Musk’s tweet, is still sitting on a 300% gain. The stock has quadrupled thanks to a momentary misunderstanding from six weeks ago, which the market hasn’t bothered to correct:
This isn’t over-exuberant so much as plain dumb. Meanwhile, on the subject of signals, another indicator that markets are growing distracted is that it is harder to tell the difference between signal and noise. Last week I commented that Cathie Wood, manager of the hugely successful Ark Investment Management, had managed to reverse a dip in Tesla’s share price virtually single-handed with the announcement that she was buying shares. Here are two contrasting responses to that comment. One reader wrote:
When someone with deep pockets buys a bunch of stock in a company, that isn't "noise." In fact, it's the very definition of "signal" in the markets. The only way it's noise is if the buyer hasn't done their research and is just investing capriciously, but that's unlikely to happen with a high-value purchase -- and certainly isn't the case with Cathy (sic) Woods (sic) and ARK Invest.
I think this is nonsense. The ARK Innovation ETF has been very successful. It’s still not that big, and we know that Cathie Wood has been a committed buyer and fan of Tesla for a while. Her actions might count as a “signal” to a small group of devoted fans. It isn’t a major market signal. I also received this comment:
Prior to your column, I'd never heard of her. I know a few traders like myself, and most of us, perhaps by being in the much-maligned "Boomer" category, pay very little attention to what goes on in the financial media… We read, perhaps, 1 or 2 commentators, keep abreast of general news developments, and may have one dedicated market news source…
My point being, that far from being deafened by Cathie Wodd's (sic) or anyone else's noise, we actually do much better by not being at all aware of such noise.
My sympathy is more with the “boomer.” I also have great sympathy for Wood. My surname is often misspelt, which is irritating, but at least it’s an unusual name.
At hectic times like this, virtually everything about a stock like Tesla is “noise” and best tuned out. This is the stock’s progress since it topped at close to $900 per share barely a month ago:
That is as noisy as it gets. And, to be clear, none of this is criticism of Wood herself. Her flagship fund’s performance brooks no argument:
I still wouldn’t want to be led by a fund that has recently enjoyed performance like that. Such performance can’t be sustained, even if managers continue to make exemplary decisions.
As a cautionary tale, I offer this chart of the rise and decline of the fund known for most of its life as the Legg Mason Value Trust. About 15 years ago, whole conferences would be given over to discussing the remarkable streak of its manager Bill Miller, who used a value style of investing to beat the S&P an incredible 15 years in a row. This makes him the Joe DiMaggio of fund managers; such consistency plainly showed great skill. However Miller, like Wood now, had a style that worked for the time in which he was operating. When the market turned against value stocks, it did so with a vengeance. Once the streak was broken in 2006, the portfolio suffered a staggering run of underperformance, lagging the S&P by 50%:
None of this meant that Miller wasn’t a good manager. But market-beating like that requires a concentrated style. If you wanted to know good value stocks to buy, it was worth following him forever. If you wanted to know whether value would continue to outperform, not so much. Similarly, Cathie Wood is obviously an exceptionally talented tech growth investor. Her decisions don’t tell us whether tech growth stocks will continue to outperform. There is something of a personality cult around her at present (which isn’t her fault) and that suggests deeply irrational exuberance, if not outright stupidity, in a corner of the market.
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