Stock-market history shows that that buying assets at very high prices leads to considerably lower future returns. Or to quote fund manager Jeremy Grantham, “A higher-priced asset will always produce a lower return than a lower-priced asset.” That’s why I’m a value investor, always looking to buy into quality companies at reasonable share prices. It’s also why I’m very worried about several market bubbles that blew much bigger in 2020/21.
Market bubbles: the FTSE 100 isn’t immune
One of the biggest market bubbles blowing up right now is in US tech stocks. Some of these mega-businesses are world leaders in their field and probably fairly priced for their future growth. But other ‘wonder stocks’ today enjoy what I would describe as insanely generous ratings. For me, far too many of these bubble stocks are priced for perfection — and beyond.
However, even boring old UK shares are not immune from market bubbles, again concentrated in the tech sector. While tech stocks account for about a fifth of the US S&P 500 index, they make up only 1% of the UK’s FTSE 100. Hence, any tech-related UK shares enjoy premium ratings — and this usually makes them far too rich for my blood. Here’s one FTSE 100 bubble stock that I certainly wouldn’t add to my ISA at current price levels.
This trust has thrashed the market
Scottish Mortgage Investment Trust (LSE: SMT) is far and away one of the UK’s best-performing investment trusts. Here’s how the trust’s shares have delivered over various periods: one year +108%, three years +147.2%, five years +314.4%, 10 years +832%. These outstanding results make SMT one of the UK’s best collective investments of the past decade by miles. However, for me, the trust has itself become a market bubble because of the number of ultra-frothy stocks lurking within it.
For the record, SMT is heavily exposed to the tech market bubble, notably in the US and China. Indeed, nine of its 10 biggest holdings are tech stocks. These include Tesla, NIO and Delivery Hero, all three of which I consider to be highly inflated bubble shares. What’s more, almost an eighth (12.3%) of the trust is invested in Elon Musk’s carmaker, which I believe to be the biggest bubble stock in modern history.
This FTSE 100 share is in bubble territory
SMT is run by two excellent fund managers, James Anderson (manager/joint manager since 2000) and Tom Slater (joint manager since 2015). Anderson and Slater should be congratulated for their ‘shoot out the lights’ performance over the past 10 years. As stock-pickers, they put their faith in high-growth businesses and disruptive companies whose share prices have thrashed the wider market.
With SMT’s share price now caught up in the latest market bubble, I expect it to be a poor performer in the coming years. After all, this is exactly what tends to happen: more often than not, yesterday’s stars become tomorrow’s dogs. Specifically, this happened in spades to the best-performing tech funds when the dotcom bubble burst in March 2000. And financial history — plus my witnessing the past four market crashes — tells me that it’s set to happen again!