Will The Bubble Splash?

On today’s show we are talking about one of the greatest threats to real estate, and it doesn’t come from real estate, or even have anything to do with real estate.

The word bubble has been making headlines lately with an increasing number of pundits calling the level of investment in AI a bubble.

Last week we talked about three styles of investing: fundamentals, momentum and arbitrage. On today’s show we are talking about the level to which a bubble has been created, and the discussion is centering around which pin is going to pop the balloon. The emphasis on the pin is misplaced in my view.

When you are in a bubble, it feels good. I know. I experienced it in the dot com bubble. My company went public in February of 1999. Much of 1998 was spent in the preparation for the public offering.

There were some really good technology companies that lost most of their valuation in the wake of the dot com bubble bursting. Amazon lost 90% of its value. Nvidia lost 85% of its value. Intel lost 80% of its value and Microsoft lost 58% of its value.

1/3 of the value of the S&P 500 is based on just 7 technology companies. If the market wakes up one day and realizes that these companies are over-valued, there will certainly be a correction. If the value of those 7 companies were to be similarly cut down as the dot com related stocks were in the year 2000, what would be the impact on the overall stock market?

Let’s do a simple thought experiment. Let’s say that these 7 stocks lose 80% of their value and that none of the other 493 companies in the S&P500 lose any value. If we see that happen, then the S&P500 would effectively lose 27.2% of its value.

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