Is the tech bubble bursting? “It sure feels, like it,” says Rob Arnott, the founder of Research Affiliates.
But the designer of numerous indexes used by the burgeoning exchange-traded fund industry is quick to add it is a grave mistake to put a prediction and a date in the same sentence.
Caution should be the watchword for investors today. “Bubbles can last longer than anyone can imagine,” Arnott says. That’s one reason “why short-selling is so dangerous.”
Arnott has believed tech stocks were in bubble territory for more than year. But that reality was brought home to the value investor early this year when he discovered that shares of GameStop were sitting in several indexes and funds that Research Affiliates created. The indexes are the FTSE-RAFI US 1000, the Russell Fundamental Large Cap and RAE US large benchmarks.
Arnott freely acknowledges he didn’t even know these investment vehicles that his team designed had purchased GameStop at about $3 a share. At that price, it was a bargain.
Shares of the video game retailer quadrupled in 2020, and then soared another 20-fold in 2021 after thousands of retail investors decided to humiliate a big hedge fund. But Arnott is the first to admit that, as a value investor, he rarely sees or expects 90-fold appreciation in any equities owned by the ETFs and indexes that his firm creates.
The Reddit-GameStop affair, coupled with the collapse of many high-flying tech stocks in recent weeks, looks to Arnott like a powerful signal that the air is starting to come out of the tech bubble. The inability of long-duration assets to sustain their prices in the face of a modest 1.5% yield on the 10-year Treasury bond only hammers home this narrative.
“I don’t know if the Fed ever had control of the yield curve though they sure acted like they did,” he says. Many investors believed they did as well.
Many of the stocks in Cathie Wood’s flagship ARK Innovation ETF recently entered bear market territory. As of this morning, shares of that ETF were down nearly 30% from the peak.
Arnott points to shares of Tesla, which somehow managed to convince investors it was a tech stock, not an automobile manufacturer. His team at Research Affiliates ran some projections on Tesla that assumed it grew at a 50% rate for the next 10 years. For the sake of comparison, Amazon has grown at a 27% clip for the past decade. Even if Tesla manages to grow 50% a year for the next 10 years in the very mature auto industry, its shares would be worth about $450 apiece. At one point this week, Tesla shares wer down 10%.
As a car aficionado, Arnott has nice things to say about Tesla’s vehicles. But when it comes to Tesla’s stock, he has doubts. “Its shares are not just priced for eternity; they are priced for the hereafter,” he observes.