Why Smart Investors Get Caught in Stock Market Bubbles
Tuesday, September 29, 2026 · Johnny Hopkins
During their recent episode, Taylor, Carlisle, and Alex Edmans discussed Why Smart Investors Get Caught in Stock Market Bubbles. Here’s an excerpt from the episode:
Why? Because humans often act in the same way. And in particular, they may be herd mentality.
If you get excited about tech, I think I’m going to be missing out, so I will go into tech myself. And because we’re all driven by the same emotions, when we make mistakes, they’re not in opposite directions, they’re in the same direction. Then what the efficient markets people would argue is if indeed the market is overly inflated, and let’s say AI is in a bubble right now, there would still be smart hedge funds who realise this, and they will short, they’ll move in the opposite direction, because if there’s clear overpricing, somebody would correct it, so there could never be large amounts of efficiency.
But again, that’s not true, because in the world, you have the possibility that whatever sentiment has caused AI to be overvalued, that can only get worse before it gets better. Let’s give an example. If we go back to the tech bubble, Julian Robertson in 2000, the founder of Tiger Global Management, extremely respected investor, he saw tech was overpriced by any sensible valuation multiples, let’s say I think Cisco was trading at 190 times.
He did the sensible fundamental based thing of shorting, but the mispricing got even crazier, people got even excited into tech. And so he was bleeding losses when his rivals were making loads of money because they were still in tech. And of course, he pleaded with investors, he said, trust me, I’m in it for the fall, it will come right.
But people don’t believe him, they might have probably maybe actually lost it, he’s just too stuck in the dark ages, he doesn’t realise the revolution. And if you have flighty capital, that can withdraw from you. And so he was liquidated in March 2000.
Almost right on cue, the tech bubble burst afterwards, but he was just not around to enjoy the victory. So actually, even if I know the market is overvalued, the smart thing to do might be to pile onto the overvaluation, which Doros did, because if you think, well, the music might play a little bit more, then I’m actually want to be on the overvalued side of the trade. And maybe right now in terms of AI, there are, I don’t think it is as clearly overvalued as tech was back in 2000.
But some people believe, yes, it’s perhaps a bit pricey, but they don’t want to be right and early. It might be better to be wrong together with their fellow professionals who are also heavily invested in AI.