Key Takeaways:
- Investing veteran Bill Smead warns against putting cash into the market’s biggest stocks.
- Smead draws comparisons between the current AI enthusiasm and the dot-com bubble of the 2000s.
- He has previously cautioned that the most popular stocks in the market could see a significant drop, potentially as much as 70%.
Bill Smead, a seasoned market veteran with four decades of experience and the founder of Smead Capital Management, warns that betting on the biggest and most popular stocks in the market, particularly those related to artificial intelligence (AI), could prove to be a mistake for investors. Despite his cautionary stance, market bulls have been pouring their investments into what Smead refers to as the “Magnificent Seven” stocks, propelling the S&P 500 to record highs.
Smead expresses concern that investors may be overlooking the inherent risks associated with the current market enthusiasm, particularly regarding AI-related stocks. He warns that the prevailing belief that the current market environment is different from previous bubbles often precedes a significant market correction.
Drawing historical parallels, Smead highlights the examples of past market manias, such as the Go-Go 1960s and the Nifty Fifty stocks, which dominated the market in the 1960s and 1970s. Despite their initial allure, the Nifty Fifty stocks experienced a sharp decline during the 1973 market crash. Similarly, he points to Cisco and Intel, two prominent stocks during the dot-com bubble of the early 2000s, which suffered substantial losses when the bubble burst. Cisco, in particular, took nearly two decades to fully recover from the aftermath of the dot-com crash, underscoring the long-term implications of speculative investing in highly popular stocks.
Several market commentators have raised alarms about the striking similarities between the current AI fervor on Wall Street and the dot-com bubble of the late 1990s and early 2000s, which resulted in a staggering 78% decline in the Nasdaq from its peak to trough.
While some argue that current market valuations may not be as inflated as they were during the dot-com bubble, Bill Smead suggests that investors should not dismiss the possibility of a significant market downturn. He likens the comparison between the two periods to a fraternity brother feeling emboldened to drink excessively because his friend managed to consume an entire case of beer.
As one of Wall Street’s most vocal bears, Smead has been outspoken about his concerns regarding the overvaluation of the market’s most popular stocks. He has previously warned that these stocks could plummet by as much as 70% in value over the coming years. Smead emphasizes his reluctance to endure the hardships associated with investing in highly popular stocks that could lead to long-term disappointment. He asserts that the current market mania is likely to end poorly and urges investors to remain cautious in the face of potential stock market failure.