At Bloomberg, Sarah Ponczek and Michael P. Regan report on the comments of Rob Arnott, who calls “buying bubble assets” an “insanely stupid” thing to do. Despite seeing bubble valuations today, Arnott cautions that “bubbles can continue longer than you can possibly imagine.” Ponczek and Regan write:
Rob Arnott has a warning for everyone who is confident they’ll know when it’s time to sell a soaring stock like Amazon.com Inc. or Tesla Inc.: getting out before the crash is much harder than it looks.
“People buying bubble assets will make money until they don’t,” the Research Affiliates co-founder said on Bloomberg’s What Goes Up podcast. “If they don’t have a view of what will it take for me to say, ‘OK, enough already, I’m going to get out,’ then they are doomed to ride the roller-coaster over the top and down. So without a sell discipline, buying bubble assets is insanely stupid.”
After a stellar run for technology stocks this year, with the Nasdaq 100 up more than 25% at one time, speculative trading sending the likes of bankruptcy stocks soaring and shares of Tesla surging nearly 300%, comparisons of elements of 2020 to the dot-com days have grown louder. The concern is that today will end catastrophically as it did then, with a bubble eventually bursting, burning those who have enjoyed the historic rebound from the depths of the coronavirus bear-market.
Research Affiliates, a smart-beta pioneer and sub-adviser to money managers including Pacific Investment Management Co., has studied the nature of bubbles for years. In an April 2018 report titled, “Yes. It’s a Bubble. So What?”, Arnott listed several evidences at the time — including tech, crypto-currencies and so-called micro-bubbles in certain stocks including Tesla — but urged investors be patient.
Arnott notes it’s not possible to time when a bubble starts or will end, though he says investors can define and identify them in real-time. The one-time editor in chief of Financial Analysts Journal provides a two-part definition. First, you’d have to use “implausible assumptions” to justify valuation multiples. Second, “the marginal buyer, the person who’s buying at today’s prices, doesn’t care about valuation models at all,” he told What Goes Up co-hosts Michael Regan and Sarah Ponczek.
Take Tesla, for example. The electric-vehicle maker sports a higher valuation than the entire U.S. auto industry excluding Tesla, and is valued at more than twice the value of Toyota Motor Corp., Arnott said. To justify the high price-tag, Tesla’s revenues would have to be comparable to sales of all those companies combined — a scenario that’s possible, but not plausible, in his view.
“I would note that I have never shorted Tesla — I’ve thought it was overpriced since it was a lot cheaper than current levels. At $300 level I was thinking it’s a short,” he said. “But I’ve never shorted it for the very simple reason that bubbles can continue longer than you can possibly imagine.”
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