Stock Market History is Repeating Itself.

The video discusses Warren Buffett's prescient 1999 prediction about the overvaluation of internet stocks, drawing parallels with today's AI-driven market exuberance. It highlights Howard Marks' recent memo on market bubbles, noting that the current hype around AI stocks, particularly the "Magnificent Seven," mirrors past speculative bubbles. Marks emphasizes that bubbles often form around new technologies due to a lack of historical valuation benchmarks. The video advises investors to focus on companies with sustainable competitive advantages and warns against assuming that high valuations guarantee future success, echoing Buffett's long-term market perspective.

• In 1999, Warren Buffett predicted that equities would not perform as well over the next 17 years compared to the previous 17 years.
• He estimated a probable annual return of around 6%, suggesting it could be lower if his prediction was incorrect.
• His forecast was contrary to the consensus of investors who expected returns over 12% annually.

"I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like they've performed in the past 17."

• Buffett's skepticism about high future returns was based on historical patterns and market behavior, not investor hype.

"If he had to pick the most probable annual return it would be around 6% noting that if he was wrong it would likely be much lower."

• Buffett's cautious approach served as a warning against the overly optimistic expectations of the time.

• Less than a year after Buffett's prediction, the dot-com bubble burst, dramatically affecting the market.
• The S&P 500 nearly halved, and the annual return over the subsequent 17 years was only 2.77%.
• Many internet stocks, including Amazon, experienced significant declines in share price.

"The S&P 500 nearly halved and the actual annual return across a subsequent 17-year period was 2.77%."

• This outcome validated Buffett's conservative forecast and highlighted the risks of speculative investing.

"Roughly 2 years later the the high-flying internet stocks including amazon.com had all crated and Bezos was unfortunately staring at a split adjusted share price of 30 from a pre-crash high of around $430."

• The dramatic fall in share prices underscored the volatility and unpredictability of new technology markets.

• Buffett compared the internet boom to past booms in the aviation and automotive industries, where many companies eventually went bankrupt.
• Jeff Bezos sought Buffett's insights on the list of automotive and aircraft manufacturers that failed.

"When new industries become phenomenons a lot of investors bet on the wrong companies."

• This highlights the importance of cautious investment in emerging industries, where initial hype often overshadows long-term viability.

• Howard Marks' memo, "On Bubble Watch," draws parallels between the current investing environment and the dot-com bubble era.
• Marks notes the current enthusiasm for artificial intelligence stocks, drawing comparisons to the 1990s internet stock surge.

"Like the internet stocks being bit up to the moon in the 1990s today we're seeing a very similar phenomenon with a different technology and that of course being artificial intelligence."

• The memo serves as a cautionary note on the potential for a new bubble in AI technology stocks.

• The top seven stocks in the S&P 500, known as the Magnificent 7, have reached eye-watering valuations, distorting the index.
• These stocks now account for over 30% of the S&P 500's weight, a significant increase from five years ago.

"The Magnificent SE now accounts for over 30% of the weight of the S&P 500 Index but as Howard marks notes if you rewind just 5 years ago that share was roughly half what it is today."

• This concentration reflects a top-heavy market, reminiscent of conditions prior to past market corrections.

"There's no doubt the S&P 500 is getting extremely topheavy and in fact prior to the emergence of The Magnificent 7 the highest share for the top seven stocks in the last 28 years was roughly 22% in the year 2000 at the height of the bubble."

• The current market dynamics suggest potential risks similar to those experienced during previous market bubbles.

• Current market conditions are reminiscent of the 1999 stock market bubble, characterized by irrational exuberance and fear of missing out (FOMO).
• Howard Marks identifies a bubble as a state of mind rather than a quantitative calculation, with key features such as irrational exuberance, adoration of assets, FOMO, and the belief that prices can go infinitely high.
• AI stocks, especially post-Trump inauguration, are experiencing similar exuberance, with companies like Nvidia being highly praised.
• Everyday investors are increasingly participating in the market, focusing on US tech and Bitcoin.
• The "Magnificent Seven" stocks have high price-to-earnings multiples, indicating strong investor commitment despite high valuations.

"In his experience, a bubble is more of a state of mind than a quantitative calculation with four key characteristics: highly irrational exuberance, outright adoration of the subject companies or assets and belief that they can't miss, massive fear of being left behind if one fails to participate, and the resulting conviction that for these stocks there is no price too high."

• Marks describes the psychological aspects of a market bubble, emphasizing emotional investment over rational analysis.

"There is a lot of exuberance regarding any business related to artificial intelligence. You know, news outlets are frequently commenting on how companies like Nvidia simply cannot miss."

• The media and public sentiment are contributing to the inflated valuations of AI stocks, reflecting a bubble-like state.

• Warren Buffett's 1999 article parallels current conditions, noting that bull markets attract investors focused on not missing out rather than on fundamentals.
• Historical bubbles often form around new technologies or concepts, as seen with the Nifty Fifty, disc drive companies, TMT internet stocks, and subprime securities.
• Newness in technology or concepts often lacks historical valuation benchmarks, leading to speculative bubbles.

"These relatively recent manias followed in the tradition of ones like the 1630s craze in Holland over recently introduced tulips and the South Sea Bubble in 1720 England."

• Historical examples illustrate the recurring pattern of speculative bubbles forming around new and untested ideas.

"The reason bubbles generally form around new things is because it's a very common practice in the valuation of stocks and stock markets to look at what's happened in the past to have a measuring stick to assess investing conditions today."

• New technologies or concepts lack historical data, leading investors to speculate without a reference point, fostering bubble conditions.

• Howard Marks uses Hans Christian Anderson's "The Emperor's New Clothes" as an analogy to describe market delusion, particularly in speculative bubbles.
• The analogy illustrates how people often go along with a shared delusion to avoid appearing unintelligent, similar to how investors behave during speculative bubbles.
• This behavior is evident in current AI stocks and was also seen in the 1999 internet stock bubble.

"Howard Marks absolutely hits the nail on the head with the analogy of Hans Christian Anderson's The Emperor's New Clothes."

• The analogy is used to explain how investors can be caught up in a collective delusion, ignoring reality for fear of being seen as uninformed.

"Most people would rather go along with a shared delusion that's making investors buckets of money than say something to the contrary and appear to be dummies."

• This quote highlights the psychological barrier that prevents people from speaking out against irrational market trends.

• Howard Marks provides three principles to avoid speculative bubbles:
  1. It's not what you buy, it's what you pay that counts.
  2. Good investing comes from buying things well, not just buying good things.
  3. No asset is so good that it can't become overpriced and dangerous, and few are so bad they can't become a bargain.

"Howard offers three guiding principles for investors to help you avoid speculative bubbles that he himself used in his early brush with a bubble back in the 1970s."

• The principles are intended to guide investors through periods of speculation by focusing on valuation rather than hype.

• Every speculative bubble contains a grain of truth that is exaggerated.
• The internet bubble of 1999 was based on the correct assumption that the internet would change the world, but it was taken too far.
• Similarly, AI is recognized as a transformative technology, but current stock valuations may not reflect actual profits.

"The difficult thing as Howard notes is that there is usually a grain of truth that underlies every Mania and bubble it just gets taken too far."

• This quote emphasizes the complexity of bubbles, where a valid concept is often inflated beyond reasonable expectations.

• Investors have prematurely decided which tech stocks will benefit from the AI age, despite these companies not yet profiting from AI.
• NVIDIA is currently the only company generating profit from AI, due to its role in providing necessary hardware.

"Investors have already decided that these seven large tech stocks will be the big beneficiaries of this AI age but the problem is none of these software companies see any profit from AI at the moment."

• This highlights the speculative nature of current investments in AI stocks, where expectations are not aligned with current financial realities.

• History suggests it's unwise to exit the market based on the fear of a crash.
• Warren Buffett's approach focuses on individual company valuations rather than trying to predict market movements.
• Markets can behave irrationally for extended periods, but ultimately, value will prevail.

"I want to make one thing clear going in though I will be talking about the level of the market I will not be predicting its next moves at Berkshire we focus almost exclusively on the valuations of individual companies looking only to a very limited extent at the valuation of the overall Market."

• This quote from Warren Buffett advises against attempting to time the market, emphasizing the importance of focusing on company fundamentals.

"The fact is that markets behave in ways sometimes for a very long stretch that are not linked to Value sooner or later though value counts."

• This underscores the importance of patience and value-based investing, suggesting that while markets may deviate from intrinsic value, they will eventually correct.

• Market prices often exceed current performance, leading to inflated valuations.
• High price-to-earnings ratios, such as those seen with Nvidia and Tesla, indicate investor optimism about future earnings growth.
• Investor patience is crucial; if earnings do not meet expectations within a certain timeframe, share prices may be adjusted downward.

"Prices move based on what people think, but in the long run, prices even out to reality."

• This quote highlights the influence of investor sentiment on short-term market prices, which eventually align with actual performance.

"Investors are buying in ahead of time and are willing to wait for the earnings to play catchup."

• Investors anticipate future earnings growth, justifying current high valuations despite present performance.

• Investors expect long-term profitability and market dominance from companies like Nvidia.
• High-tech industries face challenges from emerging technologies and competitors.
• Historical examples show that many once-dominant companies no longer hold their positions in major indices.

"Investors are assuming Nvidia will demonstrate persistence, but persistence isn't easily achieved, especially in high-tech fields."

• The quote underscores the difficulty of maintaining a competitive edge in rapidly evolving industries.

"Only half of the Nifty50 are in the S&P 500 today."

• This illustrates the volatility and turnover within major stock indices over time.

• Historical patterns suggest recurring psychological behaviors in markets, such as irrational exuberance and FOMO (fear of missing out).
• Comparing current market conditions to past events, like the 1999 tech bubble, can provide insights but not definitive outcomes.

"History doesn't repeat itself, but it often rhymes."

• This Mark Twain quote, referenced in the context of market behavior, suggests that while exact repetitions are rare, similar patterns often emerge.

"These investors will never be caught predicting that we're looking down the barrel of a 50% crash once again."

• Investors recognize recurring patterns but avoid making specific predictions about market downturns.

• Successful investing focuses on identifying companies with strong, sustainable competitive advantages.
• The durability of a company's competitive edge is more crucial than the overall growth of its industry.
• Long-term investment strategies should prioritize companies with protective "moats."

"The key to investing is not assessing how much an industry is going to affect society or how much it will grow, but rather determining the competitive advantage of any given company."

• This quote emphasizes the importance of evaluating a company's unique strengths over industry trends.

"The products or services that have wide sustainable moats around them are the ones that deliver rewards to investors."

• Companies with significant barriers to competition are more likely to provide long-term returns to investors.