Bubbles and Inverse Bubbles

Jul 2017

Since investors sometimes overreach for corporate growth, the stocks of faster growing companies may become dangerously expensive (a bubble). Correspondingly, sometimes the stock prices of average-rate-of-growth companies may not even keep pace with their own corporate earnings, as the money used to buy growth company stocks is usually raised by selling the stocks of these more typical companies—pushing their P/Es lower and making their stock prices increasingly attractive (an inverse bubble). Sooner or later, the environment of bubbles and inverse bubbles comes to an end. Perhaps the fastest growing companies slow down, either due to competition or simply due to the law of large numbers (it becomes increasingly difficult for larger companies to sustain high growth). Or perhaps overall economic growth improves, helping average companies more than growth companies, which are sometimes thought to grow independent of overall economic growth. Or perhaps someone notes that some growth-stock emperors aren’t wearing any clothes. (The current P/E for Amazon is over 150.)