Howard Marks, the co-founder, and co-chairman of Oaktree Capital Management, who predicted the dot-com bubble 25 years ago has alerted investors about cautionary signs in the market in his latest paper called, âOn Bubble Watchâ.
What Happened: According to Marks, these cautionary signs include the over-optimism in the market, ongoing AI hype, reliance on âMagnificent Sevenâ stocks, and index investing bias.
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Even though Marks doesnât âspeak authoritatively about whether we’re in a bubble,â in his paper, he does say that investors shouldn’t be indifferent to these signs.
Marks mentions in his paper that a stock market bubble manifests as a temporary mania fueled by irrational exuberance, blind adoration of companies, and an overwhelming fear of missing out.
The conviction that stocks are impervious to overvaluation, leads to the belief that âthereâs no price too high.â
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Why It Matters: About 25 years ago on Jan. 7, 2000, Marks published a memo called bubble.com, and the subject was the irrational behavior he thought was taking place with respect to tech, internet, and e-commerce stocks. This was how he predicted the dot-com bubble.
âBut for me, a bubble or crash is more a state of mind than a quantitative calculation,â he added.
Marks warranted that investors should not avoid today’s market valuations.
Drawing examples from the 2000 bubble, he highlighted the twenty companies that were the most heavily represented in the index. At the beginning of 2024, however, only six of them were still in the top twenty. Importantly, of today’s âMagnificent Seven,â only Microsoft Inc. (NASDAQ:MSFT) was in the top twenty 25 years ago.
âIn bubbles, investors treat the leading companies â and pay for their stocks â as though the firms are sure to remain leaders for decades,â he said.
He acknowledged counterarguments suggesting the market might not be in a bubble. These included the observation that while the S&P 500âs P/E ratio is elevated but not at an absurd level. Furthermore, he acknowledged that the âMagnificent Sevenâ are indeed exceptional companies, potentially justifying their high valuations.
Finally, he concluded that while the market appears expensive and perhaps slightly overheated, it doesnât exhibit the irrational exuberance characteristic of a true bubble.
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Photo courtesy: Oaktree Capital Management
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This article Billionaire Investor Who Predicted The Dot-Com Crash 25 Years Ago Warns Of Another Market Storm Brewing In The US originally appeared on Benzinga.com
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