Concentration is the essence of an escalating euphoria. By late-stage cycles, many buyers are fixating on “winners” with the purchase motive being further stock gains, rather than any logic of long-term value.
Thus, as the market soars, attention is increasingly focused on those with the largest earnings and stock price gains, and interest in the B players falls away. (This concentration effect naturally favors larger companies, perhaps because they can better absorb a rising demand.)
The second principle is the outperformance of quality and low beta stocks in a rapidly-rising market. This is clearly odd behavior and is very rare, restricted as far as I can tell to some, but not all, late-stage bull markets.
I attribute the logic for this – and this effect is something I noticed almost 40 years ago when studying the Crash of 1929 – to Chuck Prince; a series of Chuck Princes over the years might have said ...
“The market keeps going up faster and faster and there is no way commercially that I can play against it. So I have to keep dancing. But at least I don’t have to risk dancing off the cliff with a Pumatech.”
My favorite example of an extreme speculation – the most advanced stock in 1999, a very high hurdle.) “Rather, I will keep dancing with RCA or GE in 1929, Coca Cola and Avon in 1972, and Cisco and Microsoft in 1999.”
Consider a small hedge of some high-momentum stocks primarily in the US and possibly including a few of the obvious candidates in China. In previous great bubbles we have ended with sensational gains, both in speed and extent, from a decreasing number of favorites.
Can’t get all the calls right gmo.com/globalassets/a…
