Market bubble: I would not have this FTSE 100 share in my ISA today!

As market bubbles blow up across financial assets, I think this FTSE 100 share has become grossly over-priced. Here’s why I’d steer clear of it today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

With a spare £500 I’d buy these UK shares

A financial services giant, a FTSE 250 distributor, a FTSE 100 tech stock, and a gold miner are on the…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I buy this defensive FTSE 100 stock for growth and returns?

This Fool takes a closer look at a FTSE 100 stock to see if it could boost his holdings via…

Read more »

Young female analyst working at her desk in the office
Investing Articles

I robbed Mr Market of this cheap FTSE stock!

This FTSE 250 stock has crashed by almost 30% in six months. But I recently bought into this battered business…

Read more »

Mature people enjoying time together during road trip
Investing Articles

3 reasons I’m backing NIO shares to soar!

NIO shares have bounced up and down this year. But where will the share price go next? My bet is…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Up 300%, is the Hurricane Energy share price an opportunity too good to miss?

This Fool looks at why the Hurricane Energy share price has soared in the past 12 months. Should he buy…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

The BT share price crashes 20% in a month. Buy now?

The BT share price has crashed by almost a fifth since coming close to £2 on 12 July. After this…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

How I’d invest £1,000 in growth shares today to target £5,000 in a decade

Our writer reckons he could do well by choosing the right growth shares today and holding them in his portfolio…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

How passive income from stocks can speed up early retirement

By investing patiently over the years, buying quality shares has given me enough passive income to retire 10 or even…

Read more »