Tesla Chainsaw Massacre
Weekly Investment Update | By Brian Schreiner
Credit (or blame) for the title goes to Dave Nadig of ETF Database. Rob Arnott of Research Affiliates, relayed Nadig’s description of the recent 40% crash in Tesla’s stock price and the 10% decline in the S&P 500 (the 7th fastest correction of that magnitude since 1950) in this interview on Bloomberg’s Open Interest on Friday morning (24:45).
Nadig’s zinger got around and memes like this one popped up over the weekend.
Rob Arnott is a grizzled veteran who always has great insights. He’s worth following - his firm is dedicated to investment research, so reading their commentaries is time well spent.
The interview with the hosts of Open Interest last Friday was very good, and I want to share some highlights. The following are Arnott’s observations:
He said, if you think back to the bursting of the Dot-Com Bubble; the first two years after the bubble burst, the Nasdaq was down 50% on its way to being down 80% at the lows and the Russell 2000 Value Index was up 53% in the first two years of that bear market. (Hard to believe, but I checked BigCharts.com, and he’s right.)
If you have an opportunity rich environment where some stocks are remarkably cheap and other stocks remarkably expensive, you can have divergences like that. During the take-no-prisoners decline in stocks after the Great Financial Crisis, spreads in valuations between growth and value were thin. Today, the valuation spread between growth and value is similar to the dot-com era where growth stocks are trading at valuations about 8 times higher than value stocks; and historic norms are about 4 times. Value would have to beat growth by 100 percentage points just to get back to historic norms.
I don’t think there has ever been a more stark delineation between the two [growth and value]. The gap in valuation between large cap and small cap is also near record highs. We are forecasting Russell Growth to deliver 0% return per annum for the next 10 years and small cap value to produce 8% and non-US value 10%.
Of the top 10 most valuable tech stocks in the world on January 1, 2000, before the dot-com bubble (according to Gemini AI, these stocks were Microsoft, Cisco Systems, Intel, IBM, Oracle, Lucent, Nokia, Dell, Sun Microsystems and HP), how many of these beat the S&P 500 over the next 15 years?... Zero. If you’re wondering about Amazon and Apple (which was on the brink of bankruptcy), they were ranked 27th and 36th, according to Arnott. It took Microsoft 18 years to surpass the S&P 500.
There’s no doubt that the tech darlings of the late 90s were reshaping our future, but they were priced for perfection. Today, there are clear parallels between the dot-com bubble and the AI revolution. Nvidia came into 2025 priced at 30 times sales revenue, which requires virtually unheard of long term growth to justify its current price.
Competition for Nvidia is coming which will lower their market share profit margins and eat into their pricing power. Deepseek is a good example of how competitors can come into the game virtually overnight. Nvidia and Tesla can be big winners in the industry and at the same time be losers to their shareholders.
Those were Arnott’s comments. If you’ve read this far, you may be wondering what asset classes he likes these days. On Friday, when asked if he’s worried about the stock market, his opening comments on The Compound & Friends podcast were: “I’m worried and not worried… I think we may be seeing the early stages of a bursting bubble, but I also see lots of cheap assets out there: emerging market value, international value, international versus U.S., U.S. small-cap value.” α
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Interesting things I came across this week…
Retail sales rise slightly as economic uncertainty mounts (Reuters)
Absolute Return: The Party Is Just Getting Started (DavidsonKempner)
The Age of Reconstruction, speech by Douglas Murray (YouTube)
The Assets, TV miniseries based on the book Circle of Treason: A CIA Account of Traitor Aldrich Ames and the Men He Betrayed (YouTube)
Thanks for reading!
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