During his recent interview with Bloomberg, Cliff Asness discussed the one lesson investors need to learn multiple times. Here’s an excerpt from the interview:
Asness: We started our firm about an hour and a half before the 1999-2000 tech bubble.
If your viewers can’t tell I’m pretty old. I know most people have not experienced that live. It was a terrible start for us in a very similar environment through ’18, through ’20.
We came up with measures to go how crazy is it. What are the… you can always sort stocks by your favorite valuation measure.
You pick your own. Price to sales, price to earnings, price to something more proprietary. You can always get cheaper and expensive.
In the tech bubble they went to crazy differentials. If you had asked me back then, will I ever see that in my career again, I would have made one of the classic mistakes in finance.
In fact I implicitly did make this mistake even if nobody asked.
I would have said, nah that was the one in one hundred year craziness. And then, even before Covid, but certainly with Covid we saw something on our measures considerably crazier than the tech bubble.
So it was yet again, it’s a lesson we all have to learn multiple times, markets can be crazier than you think.
You can watch the entire discussion here:
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It is not clear what the lesson is but my reading of Cliff’s comments is that most mistakes can be avoided by sticking to fundamentals. In 2000 we were not long any absurdly overpriced stocks but we did do very well with one large low risk short, selling bonds of a major phone company at a premium to par and covering at 55 when they were downgraded to junk 12 months later. Being optimists we rarely short sell, but this was too good to ignore. Not very different today when several companies with significant weightings in indices are again overpriced by a wide margin.