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Drawing comparisons between previous market excesses and present tendencies, co-chairman of Oaktree Capital Management Howard Marks (Trades, Portfolio) honored the 25th anniversary of his seminal memo "bubble.com" with a new view on investment bubbles. Marks considers in his most recent note the fast rise in the "Magnificent Seven" tech stocksApple (AAPL, Financials), Microsoft (MSFT, Financials), Alphabet (GOOGL, Financials), Amazon (AMZN, Financials), Nvidia (NVDA, Financials), Meta (META, Financials), and Tesla (TSLA, Financials)and the possible signals of a bubble in their dominance of the S&P 500.
J.P. Morgan Asset Management data shows that at the end of October the seven companies accounted for 3233% of the market capitalization of the S&P 500, twice their proportion five years prior. Marks notes this as a historically high concentration, higher than levels seen in the TMT boom of late-1990s.
Drawing on his experience, Marks characterizes bubbles as driven by psychological extremes rather than just by valuation criteria. Among the characteristics of bubble thinking he notes are unreasonable excitement for leading firms, confidence in unlimited growth, and fear of missing out. Such views, he cautions, run the danger of overvaluing assets and creating conditions for dramatic corrections.
Considering earlier market bubbles, Marks describes the fall in the Nifty Fifty stocks in the 1970s, the TMT boom of the early 2000s, and the 2008 housing catastrophe. Each, he observes, was driven by creativity and arrogance, which resulted in large losses when investor hope became untenable.
Marks emphasizes caution even if he does not characterize the present market as a bubble as no asset is impervious to overvaluation. "Good investing comes from buying things well, not from buying good things," he says.
Marks ends with a realistic perspective, pointing out that while the Magnificent Seven have high values, their prices are below historical bubble excesses. He does, however, warn that history reveals even powerful businesses may experience upheaval and that rising prices frequently reduce future earnings.
This article first appeared on GuruFocus.