Put Your Blinkers On
Starstruck & Shiny Pennies
With the Belmont Stakes coming up, the third jewel of the Triple Crown, I thought it’d be timely to talk about blinkers. Truth be told, I always thought they were called blinders, but I’ve never been a horse racing expert by any means.
They force the horse to look only straight ahead and prevent them from being startled by other horses or the crowd, encouraging them to focus on running and move in a straight line.
As an investor, there will always be distractions from running in a straight line. Ironically, distractions tend to increase as the market rises.
Starstruck and shiny pennies are two of the main culprits.
Starstruck
Famous investors saying fear-inducing things can be difficult to hear. Investors like Michael Burry have been saying them loudly for several years. Look how that has gone:
One of the brightest minds in finance, Professor Aswath Damodaran, was on a podcast six months ago advocating for raising cash and purchasing collectibles as there was “no place to hide” in stocks. To his credit, he came on the same podcast last week and essentially said that markets have an uncanny way of achieving the previously thought impossible.
The lesson isn’t that these people are wrong or don’t know what they’re talking about. The lesson is that even brilliant people are unreliable market timers. Burry’s most famous trade, the 2008 mortgage short, was correct in direction but nearly bankrupted his fund in the process. His investors tried to pull out. He had to lock them in. Being right too early in markets is often indistinguishable from being wrong.
“It’s different this time” shouldn’t always be scoffed at.
Shiny Pennies
Part of what fuels these market top calls is that we have truly silly stuff happening in pockets of the market. Shiny pennies become so blinding in environments like these and they a) make us forget about stocks behaving normally and b) tempt us to dip our toe into the madness.
The AI infrastructure buildout has triggered one of the more extraordinary runs in the chip and memory space in recent memory. The Philadelphia Semiconductor Index now represents roughly 18-22% of the S&P 500’s total market cap, up from just 6% before ChatGPT launched in late 2022 and more than double what it was at the peak of the dot-com bubble. The returns year-to-date tell the story:
If you own a boring portfolio of index funds or dividend payers, looking at SanDisk up 300% makes it hard not to feel like you’re doing something wrong. That’s the shiny penny effect. It makes us forget that our investments are working exactly as intended, and it tempts us to chase something that has already made most of its move.
This year we’re also going to see IPOs from SpaceX, and likely OpenAI and Anthropic. Each of these is a prime opportunity for the markets to party too hard and get nauseous.
The bears will be absolutely furious if we somehow find a way to responsibly navigate all of this and calmly shift attention to the next wave of the AI revolution, which is likely to be robotics.
I don’t think the market can handle its liquor quite that well, but we shall see.