“Be fearful when others are greedy, and greedy when others are fearful”
Warren Buffett
Chances are you’ve heard the quote from Warren Buffett listed above. It is one of the most famous market maxims tossed around by investors. It’s right up there with saying that “the four most dangerous words in investing are this time is different,” and “buy low and sell high.” What always amazes us is that while everyone knows these quotes from the likes of Buffett and Templeton, and everyone understands what they mean, few investors, institutional or retail, seem able to walk the walk. We write today to gauge current market conditions from a fear/greed perspective and offer our view on how an investor should proceed.
We’ve been warning about frothy market conditions and valuations for a couple of years now and have regularly drawn comparisons to the late 1990s / early 2000s tech bubble. We’ve heard many of the talking heads downplay those concerns by pointing out important differences such as the fact that the valuation for today’s market darling, Nvidia (NVDA), is not anywhere close to Cisco (CSCO) in the late 90s. We’d counter by stating that valuation is in the eye of the beholder. While it may be true that NVDA is nowhere near as expensive as CSCO was on a price-to-earnings basis, it is very close to the CSCO’s price-to-sales multiple. Furthermore, on a market cap to GDP basis, NVDA’s valuation today dwarfs that of CSCO in early 2000. NVDA reached a recent peak market capitalization on May 14, 2026, of over $5.7 trillion. That represents almost 18% of the $31.8 trillion GDP in the US. Comparatively, CSCO reached its peak market cap of $555 billion in late March 2000, which represented ~ 5.6% of the $10 trillion US GDP at the time. While market cap to GDP is not the most common stock valuation metric, some would argue that it is one of the most important from a high-level standpoint. One company with a stock value that makes up almost 1/5 of US GDP is a clear sign of how concentrated and unbalanced the economy currently is.
Another common retort to our viewpoint that we’re witnessing a repeat of the 1990s stock bubble is the statement that none of the companies in the late 1990s had any sales, let alone any earnings, and today’s leaders are great businesses with rapidly growing sales and earnings. We find this argument misleading in a couple important ways. First, many of the largest publicly traded tech stocks such as Cisco Systems, Microsoft, Intel, Oracle and others were growing earnings 30% - 50% per year leading up to the 90s tech bubble bursting. Second, to state that we don’t have any important drivers of today’s rally that are unprofitable is a joke. In fact, the two companies at the epicenter of the AI boom, OpenAI and Anthropic, are currently burning cash as fast as they can raise it from investors. Since OpenAI and Anthropic are still private companies, it is hard to get a true sense for what the financials really look like. According to a Wall Street Journal article from April of this year both companies are expected to lose money for the foreseeable future with Anthropic projected to turn a full year profit in 2028 and OpenAI not projected to make money until 2030. Both companies are expected to go public, along with SpaceX, in the coming quarters, and when they do, we’ll have more visibility. Maybe these companies will prove to be economically viable in the future. Today, they are not and they are the linchpin for the entire AI boom and much of the stock market appreciation in recent years.
None of this is new. We could have said the same thing in late 2023 (and we did). However, the part that has changed is that all a sudden the consensus seems to agree with us in believing we’re experiencing a bubble in the stock market. In an interview that originally aired last fall, CNBC anchor and author, Andrew Ross Sorkin, stated “a crash is coming… I just can’t tell you when.” Jeff Bezos, founder and former CEO of Amazon, stated in a recent interview that, “even if it does turn out to be a bubble, you shouldn’t worry about it because the bubble is driving investment and a lot of the investment is going to turn out to be very healthy.” The final example comes from a recent Barron’s article titled, “If It Walks Like a Bubble and Quacks Like a Bubble, Then It’s Probably a Bubble.” To us, the message in both interviews and the Barron’s article was identical. The main takeaway is, “Yes, it is a bubble, but the bubble is going to be a lot bigger, so you need to stay in the game.”
This is where we differ. We prefer the “be right and sit tight” approach and believe it is a mistake to invest in a company or sector that we feel strongly is overvalued but has a chance in the near term to increase in price. Yet, this is exactly what the “experts” are telling us to do, and investors of all stripes are validating that approach with their investment flows. In fact, we’ve heard several talking heads in recent weeks say something to the effect of, “the bubble will eventually pop, but this stock or that sector could go up another 90% from here and we want to participate in that.” Even if that is true, even if NVDA or the Nasdaq 100 (QQQ) or the iShares Semiconductor ETF (SOXX) goes up another 90% from here, investors who leave their crystal ball at home and fail to get out before the bubble pops could still wind up with devastating losses.
As a general rule of stock market bubbles, when the bubble pops, most stocks will likely experience some downward pressure, however, the stocks / sectors that were the hottest and went up the most will likely experience the largest and most violent declines when the music stops. Cisco in the late 90s was a prime example. Please see the chart below:
Per the chart, CSCO’s stock exploded higher from Jan 1998 to March 2000, recording a cumulative price return of over 750%. When the music stopped, and the bubble popped, CSCO cratered from $80.06/share down to $8.60/share, a decline of 89%. The share price in early October 2002 was lower than the price in January 1998, before the huge increase. So, for all those analysts and investors who think you should stay invested in the hottest names, it turns out that basic math could pose a problem. Back to the example that we’ve heard numerous times in the last few weeks. If you have a $100,000 investment and it goes up 90% from here, you’re left with $190,000. If it then proceeds to drop 89%, like Cisco did in the early 2000s, you’re left with a balance of just under $21k. It’s almost like you never made any money at all, and you’re $80k underwater from where you started.
Another inconvenient fact about market bubbles, is that the areas that are leading the charge to the upside, don’t typically recover in the V-shape that investors have gotten used to in recent years. In CSCO’s case, it took over 25 years to recover the losses from the peak of the tech bubble. The Japanese bubble that popped in the late 1980s took over 35 years to get back to even. As the rule goes, the bigger the bubble and the longer it goes on, the more devastation that occurs on the downside.
What happens if we apply these historical lessons to everyone’s favorite stock today, NVIDIA, Corp. The chart below shows NVDA’s shares price from 12/31/21 to 6/1/26:
NVDA’s share price has grown from $29.41 on December 31, 2021, to just under $225/share today. That represents a cumulative price return of ~ 670%. If NVDA ends up suffering a similar fate as CSCO and declines by 89% from here, the share price would drop to ~ $24.75, below the price in late 2021. We’re not predicting that NVDA will drop by 80% or more, but it is a possibility and it would not be without historical precedent.
But wait….it gets worse! For all those who have benefited from NVDA’s meteoric rise in recent years, which is almost everyone either intentionally or unintentionally through a mutual fund or ETF, chances are high that their portfolio exposure to NVDA is much larger today than it was in 2022 before the massive gains began. This results from two sources. The first is passive in the sense that NVDA has gone up much more than the average stock, and therefore, unless an investor has regularly rebalanced and parred the NVDA exposure back, the portfolio weighting is much higher today simply because of the relative outperformance. The other element is the chase aspect. After a stock or fund experiences strong gains, investors actively move more and more money to that stock/fund. That leaves us where we are today with NVDA alone representing almost 8% of the S&P 500 and well over 10% of many mutual funds and ETFs. What this ultimately means is that a smaller percentage of the index or an investor’s portfolio experienced the full effect of NVDA’s gains in recent years, but if/when the bubble pops, investors will have a higher percentage allocation to NVDA and feel the full wrath of the downside. That could be devastating for many investors, especially retirees or those near retirement who think they’ve got a broadly diversified basket of stocks with index funds or actively managed strategies that have, in fact, been sucked in like everyone else.
So, everyone seems to now agree that we’re in a bubble, but the question remains when will the bubble pop? The answer, of course, is nobody knows. Most investors are content to keep dancing. We choose to heed the advice of George Santayana who said, “those who do not learn history are doomed to repeat it.” That doesn’t mean it is easy. In fact, it is very difficult not to be exposed to the hottest stocks and the hottest sectors that seem to offer infinite gains (or at least two more years of gains according to the people on TV). We do take some solace in knowing that the path we’ve chosen, while less traveled, seems to be a similar path to some of the all-time investing legends. For example, Warren Buffett and his company, Berkshire Hathaway, refused to take part in the internet boom in the late 1990s and the stock suffered as a result. See the chart below comparing Berkshire’s stock to the performance of the S&P 500 from May 1999 to March 2000:
As you can see, Buffett’s company trailed the performance of the S&P 500 by over 50% during the 10-month period. At the time it was thought that Buffett had lost his touch, and he was ridiculed by a well-known financial TV personality in early 2000. However, once the bubble popped, the index cratered, Berkshire stock recovered and the rest is history. Another great example is John Templeton and the Templeton Growth Fund during the Japanese stock bubble of the 1980s. Templeton sold all his Japanese stocks in the mid-1980s as he felt they were overvalued. Japanese stocks continued to soar all the way to 1989, and Templeton’s fund trailed its benchmark by 100% over a 5-year period. Just as analysts were predicting many more years of outperformance by Japanese financial assets, the bubble popped, and John Templeton went on to deliver one of the most impressive performance records of any fund manager in history, beating the world stock index by 3.7% compound over a 38-year career managing the fund. Even Peter Lynch, the famed portfolio manager of the Fidelity Magellan fund who is often thought of as more of a growth investor, would likely steer clear big tech and semi stocks today. He dedicated an entire chapter of his famous book, “One Up On Wall Street”, to warn investors about the kind of bubbly stocks we’re witnessing today. Chapter 9 of that book is titled, “Stocks I’d Avoid.” For anyone who is so inclined, we’d challenge you to read the first few paragraphs of that chapter and argue that today’s version of what he’s warning against is not NVIDIA or Micron or one of the other high flying semiconductor stocks.
Our message is not all doom and gloom (no, seriously). In fact, if we’re correct about a large market bubble bursting, as painful as that will be, it also means that there will be enormous potential on the other side. The question is do you ride the wave in the hottest stocks, or do you go to the areas where there is good value today and sit and wait? The historical experience of some of the all-time greats like Buffett, Templeton, and Lynch seem to argue for reduced exposure to the hottest areas and patience. On the other hand, you can turn on CNBC and see a steady parade of experts and analysts say that we’ve got at least a year or two to go and you’d be silly not to participate. Technology and semiconductor stocks may go up tomorrow. They may go up for the next month. They may even go up for the next 6 -12 months. Investors who want exposure to those hot areas will be happy as long as the price keeps going up. To us, it seems greedy.
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