Daily new all-time highs each and every consecutive day is not a normal phenomenon. The current stock market bubble is made up of many individual cases of bubble sightings. One sign in particular that I want to highlight is the recent occurrence of regular and repeated all-time new highs for many of the largest market cap companies. FANG stocks are a key example. I will also show an example of a non-FANG non-tech stock that has low volatility and momentum based gains.
Low Volatility and Momentum Based gains to All-Time new highs amongst FANG stocks
Our first example is Netflix (NFLX). Netflix’s closing price to end 2017 was $191.96. Netflix had an all-time high price of $202.68 back on Oct 16th, 2017. However, that didn’t stop Netflix from spending the first two trading weeks of 2018 with just outstanding gains. The first trading day of 2018 saw Netflix gain 4.75% bringing it just barely below its all-time high with a closing price of $201.07. I’ve charted out the full first two weeks of Netflix’s trading days in the chart below.
When you analyze this table, the sheer momentum behind Netflix is evident. We are nine days into 2018 and Netflix has already gained 15.25% for the year. That’s full year’s worth of gains all within two weeks. What could possibly be the reason for a company to go up every single day of the year by 1% or 2% each day, with only a single down day in the lot? Valuations certainly aren’t a reason for this situation. Clearly a situation of irrational exuberance or a stock market bubble sighting.
The Efficient Market Hypothesis says this is not supposed to be possible
If we were to accept the efficient market hypothesis, stock prices are supposed to fairly value each company at all times, based on the information available. Are we to believe that Netflix had 1.98% more subscribers on January 3rd vs January 2nd? What about an additional 0.28% subscribers January 4th over January 3rd? Or another 2.12% subscribers January 5th versus January 4th?
Granted, I’ve already made it clear that I believe the efficient market hypothesis is worthless. Even if we say that day-to-day changes are too ridiculous, there is no possible way that Netflix has created 15.25% more value in perpetuity now versus at the end of 2017. You certainly can’t use tax cuts as a reason for this change, as those were supposedly already incorporated by the end of the year in 2017.
The basic point is that this sort of ceaseless and uninterrupted buying with no volatility isn’t normal. It’s not real. There is NO intrinsic basis for any of these gains. Could you imagine the scenario where this continues for an entire year? This is the sort of thing you see during a stock market bubble. You’d be up nearly 350% after a full year. We’re living in a fantasy land, at least with Netflix. Perhaps with all of the FANG stocks.
Amazon stock (AMZN) posts nine straight days of gains and eight straight days of all-time new highs
Let’s take a quick look at Amazon stock as another example of this stock market bubble.
Amazon has done even better than Netflix on a consecutive gains basis. Amazon has had ZERO negative trading days in the first nine of 2018. That’s insane, especially at all-time highs. In addition, Amazon has also earned an entire year’s worth of returns in only nine days. Amazon stockholders are already up 11.6% year-to-date. Who wouldn’t be happy with that?
Although, it’s important for Amazon stockholders to ignore valuations completely if they want to stay happy. Amazon currently trades at a P/E ratio of 329.44. On the bright side, Amazon also offers their shareholders numerous choices of products they can spend their newly earned capital gains.
Stock Market Bubble 2018: Not just the FANG stocks
Although FANG stocks get all the press, they aren’t the only contributors to this irrational exuberance which has gripped investors. Berkshire Hathaway (BRK.B) offers a great example of the current mania of a non-tech stock within the grip of momentum traders. The company has two share classes: A class and B class. I will use the B shares for this example because they are more relatable for individual investors. Berkshire Hathaway’s price movements are recorded in the table below.
One difference you’ll notice right away is that Berkshire Hathaway actually began the year in the red. That’s pretty much the only difference on the stock price side though, because it then continued to roll off eight consecutive days of all-time highs for its stock price.
I want to reiterate that these sort of paper gains are not real. They’re not based upon anything. You can see Berkshire Hathaway’s stock up 6.02% year-to-date, but that doesn’t represent long-term real wealth for stockholders. The company isn’t selling 6% more product today on a normalized basis than it was two weeks ago. Instead, the market is just bidding up the price for new investors to buy shares.
Irrational Exuberance and Rising Stock Prices are Bad for Value Investors
This behavior shouldn’t happen. The stock market is one of the only areas in life where people get more excited as prices rise. There should be no difference between how you feel when your stock prices rise than when the price of your hamburger meat at the grocery store rises. In both cases, the price rising hurts you. Now you have to spend more money to eat the same number of hamburgers as a family. The same is true for rising stock prices. Now it costs you more money to acquire additional shares in a great business.
Berkshire Hathaway, unlike Netflix or Amazon, is a great business worth owning shares. Whether you currently own shares or not, as long as you’re in the accumulation phase of your life, you want share prices to DROP not increase.
It’s times like these which are incredibly frustrating for a value investor. The important thing to remember is that your goal as an investor is to buy the largest amount of low-risk profits you can at the cheapest price available. When buying stocks, the price you pay is paramount. You should not buy simply because prices are rising. There are a lot of embedded emotions that even I struggle to contain during times like this. The fear of missing out is real, but remember that there are other value investors out there as well, holding on tight to their cash and waiting for better days and better prices.
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