In a single Tweet on the demerits of a “fund of crypto hedge funds,” the legendary Cliff Asness managed to interweave the madness of meme-stocks and the volatility-suppressing valuation methods of some private asset managers. He dubbed this troika of financial turpitude “the unified field theory of overpriced FOMO nonsense.”
How he merged all these financial tropes into one hilarious tweet is beyond our comprehension. But we are glad he did. The laughter was welcome as the AI bubble puts up a ferocious rearguard fight on behalf of the highly valued swath of the market.
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KCR will use this quick post to submit an additional item under the broad umbrella of “overpriced FOMO nonsense.” Summarily, we think the most expensive quintile of the S&P 500’s constituent members, as measured by price to sales (P/S), are solid candidates for inclusion. The chart below shows:
- Navy Blue Line: the price-to-sales ratio of the 100 most expensive stocks in the S&P 500 (quintile)
- Light Blue Line: the price-to-sales ratio of the entire S&P 500
- Gray Line: the price-to-sales ratio of the 100 cheapest stocks in the S&P 500 (quintile)
100 of the largest stocks in the largest stock market are now priced at ~10x sales. Complicated? We think not.
We have done our best to summarize books documenting centuries of financial folly, how inevitable financial crises can be mitigated by a margin of safety, and some of the academic evidence for inefficient markets. At some point, however, you can boil the madness of markets down to one simple line.
The data above is so extreme that we just need to sit back and let economic gravity do its thing.
We first revisited the Sun Microsystems quote explaining the epic stupidity of investing in stocks at these multiples in March 2021. You don’t need the full article, just the quote we provided, to understand how easily you can slash your investment risk. The problem with paying brutally high multiples for stocks is that you don’t need a financial crisis to lose a large amount of money.