A Quick Review of Equity Market Declines Post Bubble Peaks

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Brutal end to Q1 for investors who buy cheap stocks, quality stocks, or some mix of the two. Quick review.

The Wall Street Journal’s James Mackintosh recently penned an outstanding article explaining the violent rally in low-quality growth between March 14th and March 31st. A former writer/editor of the Financial Times’ Short View, Mr. Macintosh has a background in philosophy and psychology and is a like-minded individual. He explains how investor sentiment drove the recent snapback despite the continued deterioration in fundamentals.

A very popular narrative over the last few years has been that fundamentals no longer work. That’s always the story at market peaks. Our bear traders post is worth a quick visit to remember the carnage that follows such nonsense. For long-term investors interested in compounding their capital with some margin of safety, markets like today challenge us to stay disciplined.

A recently famous fund manager claimed that “innovation was on sale.” We hope our piece last week on speculative growth investing puts such nonsense to rest. Amidst a gale of people selling arithmetically impossible exponential growth narratives, KCR has insisted on stating the obvious: a cash-consuming stock with an unviable business model and no economic barrier to entry is likely to be cheap only when its price hits zero.

As we explained in market cap vs revenues, that a stock falling from 40x to 20x price to sales is “cheap,” defies the lessons of history. Great buying opportunities in innovative companies are somewhere in the future. Likely after a great bear market in the speculative fury we are coming out of. In the meantime….

Let’s keep our emotions at bay. Let’s stop trying to pick bear market bottoms in speculative stocks. Let’s stop making the simple discipline of proven investment processes complicated.

The top chart below shows the rolling 10-day performance spreads between the Russell 1000 Growth Index minus the Russell 1000 Value Index.

  1. The dashed red line shows you the 95th percentile of observations (when growth crushes value)
  2. The dashed green line shows the 5th percentile (when value crushes growth)
  3. You can see on the far right that the violence of back-and-forth swings between growth and value have hit these levels in the manic run through today in a way last seen in the internet bubble