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Concentration is the essence of an escalating euphoria. By late-stage cycles, many buyers are fixating on “winners” with the purchase motive being further stock gains, rather than any logic of long-term value.
Thus, as the market soars, attention is increasingly focused on those with the largest earnings and stock price gains, and interest in the B players falls away. (This concentration effect naturally favors larger companies, perhaps because they can better absorb a rising demand.)
The second principle is the outperformance of quality and low beta stocks in a rapidly-rising market. This is clearly odd behavior and is very rare, restricted as far as I can tell to some, but not all, late-stage bull markets.
I attribute the logic for this – and this effect is something I noticed almost 40 years ago when studying the Crash of 1929 – to Chuck Prince; a series of Chuck Princes over the years might have said ...
“The market keeps going up faster and faster and there is no way commercially that I can play against it. So I have to keep dancing. But at least I don’t have to risk dancing off the cliff with a Pumatech.”
My favorite example of an extreme speculation – the most advanced stock in 1999, a very high hurdle.) “Rather, I will keep dancing with RCA or GE in 1929, Coca Cola and Avon in 1972, and Cisco and Microsoft in 1999.”
Consider a small hedge of some high-momentum stocks primarily in the US and possibly including a few of the obvious candidates in China. In previous great bubbles we have ended with sensational gains, both in speed and extent, from a decreasing number of favorites.
Can’t get all the calls right https://www.gmo.com/globalassets/articles/viewpoints/2018/jg_bracing-yourself_vp_1-18.pdf
more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets
All bubbles end with near universal acceptance that the current one will not end yet…because
And here we are again, waiting for the last dance and, eventually, for the music to stop.
Nothing in investing perfectly repeats. Certainly not investment bubbles. Each form of irrational exuberance is different; we are just looking for what you might call spiritual similarities.
Even with hindsight, it is seldom easy to point to the pin that burst the bubble. The main reason for this lack of clarity is that the great bull markets did not break when they were presented with a major unexpected negative.
The great bull markets typically turn down when the market conditions are very favorable, just subtly less favorable than they were yesterday. And that is why they are always missed.
Either way, the market is now checking off all the touchy-feely characteristics of a major bubble. The most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears
He was referencing Chuck Prince but all I could think of is bulls saying "and I took it personally"
https://www.gmo.com/americas/research-library/waiting-for-the-last-dance/
https://www.gmo.com/americas/research-library/waiting-for-the-last-dance/
