The difference between Amazon and Peloton is how much capital is at risk. Amazon has nearly $2 trillion tied up in it and Peloton is tiny in comparison. Amazon’s well-known fact has been developing for 20 years and the company’s shares have maintained very high valuations the entire time. Whatever the post-Covid-19-era looks like, will Americans ever be more controlled by Amazon than in 2020 and will there ever be this much excitement about biking at home? Questions like this make our theory and its investment implications fun to work with.
The problem in today’s S&P 500 Index is that it is the most concentrated in companies tied to the well-known facts exacerbated by Covid-19. Therefore, the risks in the stock market look very much like the risks did at the start of the year 2000. Buyers beware!
If you’d like to avoid stock market failure just look at the way oil and oil stocks traded in 2008, 2011 and 2014 based on the well-known fact called Peak Oil Theory. Investors could see nothing but higher oil prices and oil stocks were 15% of the S&P 500 Index. Since then, every Tom, Dick and Harry poked holes in the ground and found oil in the U.S., sending oil prices way down. Today, Peak Oil Theory is out the window and the “Green New Deal” and ESG investing are convincing people that we won’t need the oil for a long time.
You can buy more oil in the ground in proven reserves today, than at any time since 1999. Energy stocks are barely more than 2% of the S&P 500 Index and any comeback they make won’t stop stock market failure for index investors. Isn’t it ironic that this coincides with another tech bubble?
William Smead is chief investment officer at Smead Capital Management.