The legendary investor who predicted the dot-com crash says a key ingredient for a market bubble is missing
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The famous investor Howard Marks follows the stock market.
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Marks said past bubbles involved new innovations, such as artificial intelligence, that ultimately led to skyrocketing valuations.
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However, while the market environment is frothy, it is missing a key ingredient of a bubble, Marks said.
Legendary investor Howard Marks, who famously warned of the dot-com bubble just three months before it peaked in 2000, is officially on “bubble watch.”
Marks, co-founder of Oaktree Capital Management, pointed out several warning signs in a recent letter to clients who suggest the stock market is approaching bubble territory, but say one key ingredient is missing.
Marks pointed out that artificial intelligence is a new revolutionary technology that drives potential bubble.
“The bubbles I lived through involved innovation,” Marks said, pointing to disc companies in the 1980s, Internet stocks in the 1990s and subprime mortgages in the 2000s.
But for Marks, the key ingredient for a stock market to be in a bubble is the willingness of most investors to buy stocks that are trading at inflated valuations.
Such behavior was prevalent during the dot-com bubble, such as when an Internet stock would go public at an already high price and then triple in its first day of trading.
That’s not happening, at least not yet.
“I don’t hear people saying ‘the price is not too high,'” Marks said.
Additionally, Marks argued that while the stock market is overvalued, it’s “not crazy.”
“The markets, while expensive and maybe frothy, don’t seem crazy to me,” he said.
He noted that innovation means investors have no history as a guide to base their growth expectations on, suggesting that valuations can go to skyrocketing levels based on expectations that “this time is different.”
That kind of thinking often weakens the investment psychology needed for a bubble to form, persist and burst once reality inevitably hits, Marks said.
Speaking about the current market environment, Marks highlighted warning signs of a bubble, including heightened investor optimism that has been running since late 2022 (around the same time ChatGPT is introduced), an above-average rating for S&P 500 (a forward price-to-earnings ratio of nearly 22x) and the prevailing assumption that mega-cap tech companies will forever lead the market higher.
Marks noticed that of the 20 largest publicly traded US companies in the early 2000s, just before the dot-com bubble burst, only six remained in the top 20.
