Investor who predicted dot-com crash issues chilling three-word warning as another market storm brews

A billionaire investor who predicted the dot-com crash 25 years ago has warned he is ‘on bubble watch’ as ​​warning signs appear to have emerged in the market.

Howard Marks, one of the most respected value investors, pointed out warning signs in the stock market that could mean poor returns in the long term or a big drop in the short term.

‘It should come as no surprise that the return on an investment largely depends on the price paid for it. For that reason, investors clearly should not be indifferent to the current market valuation,” Marks said wrote in his last memo.

He said that while he doesn’t believe a bubble is an immediate threat, there are signs he’s seeing that could speed up the process.

These include market optimism since late 2022, enthusiasm for artificial intelligence, dependence on tech giants and preference for index investing.

Marks said the S&P 500’s above-average valuation, and the fact that stocks in most industry groups are selling at higher prices than stocks in those sectors in the rest of the world, was one of the “warning signs” of a bubble.

He also mentioned Bitcoin, saying, “Regardless of its merits, the fact that its price has risen 465% over the past two years does not indicate excessive caution.”

‘A bubble reflects not only a rapid rise in stock prices, but is a temporary mania characterized by – or, perhaps better, resulting from – the following: highly irrational exuberance, outright admiration for the companies or assets in question, and the belief that they What we shouldn’t miss is the enormous fear of being left behind if someone doesn’t participate, and the resulting belief that for these stocks, “no price is too high,” Marks wrote.

Marks said the S&P 500’s above-average valuation, and the fact that stocks in most industry groups are selling at higher prices than stocks in those sectors in the rest of the world, was one of the “warning signs” of a bubble .

Yet he also offered counterarguments to his points, stating that the price/earnings ratio on the S&P 500 is high, “but not insane.” The seven best performing companies, also called the ‘Magnificent Seven’, are great companies that may have guaranteed high price-to-earnings ratios

Looking at examples from the 2000 bubble, he highlighted the 20 companies that were most strongly represented in the index.

At the beginning of 2024, only six were in the top twenty. Microsoft Inc, one of today’s leading companies, was at the top 25 years ago.

“In bubbles, investors treat the leading companies – and pay for their shares – as if the companies are sure to remain leaders for decades,” he said.

Marks was particularly troubled by the enthusiasm behind AI, which he thought could be extended to other high-tech areas.

Yet he also offered counterarguments to his points, stating that the price/earnings ratio on the S&P 500 is high, “but not insane.” The seven best performing companies, called the ‘Magnificent Seven’, are great companies that may have guaranteed high price-to-earnings ratios.

Marks added that he hadn’t heard people say, “There’s no price too high,” which he saw as a clear sign of a bubble, and said that while the markets are expensive, they don’t seem extreme.

He concluded: “I’m not a stock investor, and I’m certainly not an expert on technology. So I can’t speak with authority on whether we are in a bubble. I just want to lay out the facts as I see them and suggest how you might think about them… just as I did 25 years ago.”