By skyforbes These news were disturbing to me. I have always been passive investor, trying to have the least possible number of sales and purchases as possible, to filter out noise, and follow my convictions.
This, however, got me thinking. This is not normal, and can't be justified in the eyes of time. I know, I know – "this time it's different". Romans thought it too. It's not normal for a single company to have a valuation equal to nearly 1/6th of the GDP of USA. It is NOT normal. It's not sustainable. It does not create 1/6th of the value in the country. People don't eat it, drink it, or live in it. It's products are not 1/6th of your life or used 1/6th of your time.
It's not normal for 10 companies to pull the entire index up, while the others are stagnating or declining.
I have neither the personal analysis, nor the necessary skillset, or even just the sheer time to make a detailed analysis of the performance of each of the 500, but my conviction, based on my speculation and far-gaze is that the money are flowing in fomo to the hottest potato on the market, and, at least in my mind, there is a doubt, that the red is not based on (just, if any) the poor performance, management or sales of those 490 companies, but rather is capital being redirected to the forerunners, that have more and more ungodly expectations for performance bestowed upon them each new day, and these new and outlandish expectations are already priced in, and being upped with each new hype (Notice I didn't say pump. But really wanted to.)
AI.
The buzzword. The new hegemon.
And don't get me wrong. I see it. I believe in it. I think, no, I am convinced we're on the verge of an Era. And AI is not the Era itself, it's just a corner stone, a building block of it. A big one, maybe the biggest, but not the entire thing.
The humanity is on the doorstep of, most probably, the last epoch that we will see slavery again.
And this time, we will convince ourselves, as spicies, that this slavery is different (mhm, again). It's not inhumane, because the slaves will be made of metal and circuits. Slaves that don't drink, sleep or eat, that don't have free will, and are, literally, created and programed for whatever we want. "And it's not inhumane" humanity will cheer. Anybody played Detroit:Become Human? That's what happens after.
But while we get to the Detroit scenario, imagine the progress. Imagine being able to create a factory, that builds cars, or toys, or whatever your heart desires, filled with workers, that costed you a one time payment of a price, equal to around one-year salary for a human worker. And that factory works 24/7, with no recurring costs, other than maintenance and utilities.
It's happening. Right now.
But it's happening slow. Slower than we wish, slower than we hope, and more diversified, than we can imagine. Or at least than I can imagine. Maybe you're better than me.
And it's not a single company, that will do it. Remember Cisco ($NASDAQ:CSCO)? They were gonna run the internet themselves. 25 years later, they're still below their ATH. It's the world, that's gonna do it. The companies that are producing the best examples are still not even public yet (Yes, I'm looking at you, Figure8).
We have extreme expectations, priced in in a handful of companies. Behemots of industry, with uber-large staffing, rigid framework and heavy beaurocratic procedures, because this is what happens when you're a behemot of industry. It's how the world turns, ever since the Romans, because it's just how it works, if you want to command a large structure.
And large and rigid structures are slow. Slow to innovate, slow to adapt, slow to move, because they are large. Swans and innovation come from small, nimble and adaptive organisms, because they can leap like no one else. And when someone strikes the gold vein, and skyrokets, they stop innovating, and start building rigidity, predictability and dependability.
At least in my view, that is.
What is my thesis?
This concentartion is not sustainable. Those valuations are outlandish, and those promises and expecations are unkeepable. It's not normal, and it should bother you. It should bother all of us. Eggs in one basket, ever heard the telling? The world is more than AI or robotics, and that's coming from me, and I am heavily invested in tech.
And sooner or later, the world is gonna have a sobering slap and remember it. I don't know when it's gonna be, but my speculation is that it will start with broken promises. Lack of adoption or enougu real world applications, that will make the doubts creep in under the itchy skin of Mr. Market. And then, oh my.
Saying all of that, I am here to actually ask a question.
These news were bothering to me, and got me thinking: Isn't it prudent to sell the winners and buy the underdogs when they're undervalued? Sounds 'bout right to me. I did a bit of research with Perplexity AI (hehe, the irony, eh?), and then double checked, and it turns out, historically Equal Weight 500 was beating Market Weight, by a good margin (+3-4% annually, IIRC). Last 10 years are a different story though. And now, we have the biggest, visible divergence of the two, widening the gap visually on the chart, from 2014 until now. I am quoting 2014 because this is the starting point of the ETF I am looking at: $XETR:XDEW . Currently, I hold my S&P position entirely in $XETR:SXR8 .
I am thinking… Should I switch from $XETR:SXR8 to $XETR:XDEW and bet on mean reversion? Perplexity told me I'm right, but to be fair, would you believe a slave's praise to it's master? I wouldn't.
Strategy is to track conecntration and breadth, and hold $XETR:XDEW while the capital within the 500 restructures, and then switch to market cap again, once the dust has settled, and the hangover from the sobering up has passed.
I am really eager to hear opinions on this. I am not sure about it. I am sure about the part that's not normal, but I am not sure on what's the best strategy to deal with it, and as passively as possible.
I am not convinced that I want to be the dumb roommate and miss the party too.
So… That's my 5 cents 🙂
Looking for yours