• The Hazards of being In the Grip of a Growth Mania
  • The Resurrection of Value Post a Period of Manic Growth
  • Conclusion & Exhibit

The Hazards of being In the Grip of a Growth Mania

In This Time is Different, Carvana & Akamai and IPO Stocks are the New Staples, Kailash documented:

1. Big Data is being used to substantiate indefensible valuations and assert that traditional valuation is dead
2. Firms benefitting from this like Carvana, Tesla, Uber, and many others are no different than the firms which, in the internet bubble, literally issued stock to sustain fundamentally failed businesses
3. The historically failed “addressable market & winner-take-all” rationale today is identical to 1999
4. This narrative device “…illustrates the timeless appeal of investing and the hope, usually unrealized, that the new thing will make us rich” has been a recurrent theme in manias since the days of John Law
5. Even with perfect foresight, overpaying for firms which would thrive in the decades ahead overwhelmingly led to investor losses
6. The performance leadership of overvalued firms is more pronounced today than in the run-up to 2000
7. This may be unfortunate because 50% of High Growth1 showed up in the worst two deciles of performance in the years subsequent to the market’s 2000 peak
8. Many IPO stocks are the epitome of this narrative delusion with the recent additions to indexes being more richly priced and fundamentally flawed than those seen at the peak of the internet bubble
9. Valuations of today’s new High Growth stocks are equally, if not more, overvalued than those in 2000

Figure 1 below seeks to build on the items above by showing the historical percentage of High Growth firms that outperformed over the next 12 months. From 1996-1999 betting on High Growth stocks was a winning decision as their win rate vs. the market soared from 19% to 62% before the group imploded, and its batting average fell to 6%. In a near-perfect reprise, the period from 2015-2019 encompassed a run from 20% to 71% before falling to 57% today. While impossible to time, Kailash believes the winning streak of today’s Growth stocks will follow the 2000 trajectory and eventually crash toward the zero bound as it did towards the end of 2000.


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