There are some significantly worrying aspects to the markets’ dependence on technology and especially US tech. The phenomenon has not only been fuelled by great business results but froth which is irrational and excessive and investors may need to be reminded that bubbles do burst. So, what are the reasons this time round which have pumped such additional colossal sums into the same stocks to make them rocket? This isn’t exhaustive but:
1. The trend towards ‘index tracking’ investment as it is ‘cheap’… the bigger you are (good, bad or ugly) the more money which will flow to you as your stock speaks for a bigger chunk of the index.
2. The gentle move towards ‘ethical investments’ – as if these US Tech giants really fit that mould (tax cheating, censorship failings, scam promoting, dubious business practices, etc) but sure enough, most ethical funds are pretending to be fluffily friendly to their innocent investors but they have filled their boots with this sort of stuff, again propelling values higher.
3. The ability of naïve first-time investors (especially in the US) to trade in these stocks – you only want to buy shares which go-up and by lots don’t you?
4. The ability to buy on margin – so you open a broking account, deposit £1000 and the ‘market’ will allow you to buy say £10000 of shares. They go up 10%, hey, you’ve doubled your money – why wouldn’t everyone want to do that?
5. The rotation out of traditional stocks – value – I mean, who wants to buy those guys – their performance has been awful and not only have you lost money on those but you have lost what you could have gained from being in tech.
6. More advisers and investment managers feel drawn to ensuring they are fully connected to the ‘party going at full swing’ so they too drive colossal sums of money in the same direction.
Please be careful as in our view the risk of investing in these companies now at such inflated values is very high indeed. We favour buying better value opportunities that will enjoy improved fortunes tomorrow, not those where potentially the best times are in the past.
