I suppose extreme distortion is what you get whenever you have the type of runs on markets that we have witnessed for quite some time now. However, when we see spreads like small caps to large caps, or emerging versus developed markets trading at multi-decade highs, you begin to wonder if this time truly is different.
Certainly, it would be unlikely for companies such as Amazon or Google to ever lose 90% of their value again like they did when the dot-com bubble burst. The tech giants are producing too much cash, they control too much of our data, and they have diversified into many other industries. I mean, whoever saw paying for stuff with our phones coming?
Having said that, we did just witness the biggest outflows in tech stocks ever, and the rotation into laggards has evidently already begun. The reason we may want to have some of these so called “falling knives” type of trades in our portfolio is maths. When something has underperformed by more than 50%, we can double our money if it mean-reverts.
China is an obvious example. We could also look into buying telecoms, real estate, South America, banks, and so many other sectors, countries, instruments, or regions that have got absolutely clobbered in recent years. All except the FTSE100. There is simply no hope for an index whose components have an average age of 115 years.
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