“The law of opinion refers to general precepts established by public opinion. It is the “law of fashion,” which may merely reflect what is in vogue or what is a group’s collective preference. In modern parlance we may call this “contemporary community standards.”
— The Law of Fashion, John Locke

We’ve been thinking about John Locke’s “Law of Fashion” in the context of the U.S. common stock market. It reminded us of Luther Vandross’s wonderful song, “Always and Forever.” It is a love song and exactly the kind of love which investors give to long-term success stories when their share prices are in the maniacal/over-ownership phase.

     Always and forever
     Each moment with you
     Is just like a dream to me
     That somehow came true, yeah

Look at the ten-year charts of Amazon, Apple, and Microsoft:

These stock results are “just like a dream” to the investors who took that leap of faith ten years ago. Even a few years ago, like Warren Buffett’s Apple purchase, has been a “dream.” Despite buying into something that had already gone through the roof, these stocks made common stock investor dreams “come true.”

     And if you get lonely
     Call me and take
     A second to give to me
     That magic you make

If you are wondering if it is lonely not owning these hot tech-related stocks, just look above at the 50 largest holdings owned by the largest hedge fund managers. Eighteen of the twenty most heavily-owned stocks are tech-related. These hedge-fund managers must have success on a six-to-twelve-month basis to keep their jobs (five years for us). Or look at the AUM growth (below) of the ARK ETFs over the last two years, which are invested in the most aggressive disruptors in tech.

     Everyday, love me your own special way
     Melt all my heart away, with a smile
     Take time to tell me, you really care
     And we’ll share tomorrow together

Therefore, these mega-successful companies are now “taking time” buying advertisements on the cable channels (they seek to make extinct) to tell everyone they “really care!” Are we all frogs in the technology boiling water? By the time we find out how damaging it is to get free delivery or squander massive energy on server farms or pollute our minds via social media and pornography, it will be too late for our economy.

     And I know tomorrow
     Will still be the same
     ‘Cause we got a life of love
     That won’t ever change

The law of fashion is incredibly powerful, and it is unlikely that tech stock success “tomorrow will still be the same.” Ask Amazon what it is like to do logistics with 1.2 million employees when drivers are hard to hire and trucks are in short supply. The reason this law of fashion comes to an end comes from two of Locke’s other laws. First, pressure is growing via “civil law” in the form of antitrust actions, to get in the way of the “Wild West” regulatory environment of these monopolistically vast combinations.

Second, the divine law, called “mean reversion,” will rear its ugly head at some point. All great excitement about new technologies historically has eventually died and crushed the stock prices of investors who overstayed their welcome. Over the decades, it is the largest factor in stock market failure. In his great book, A Short History of Financial Euphoria, John Kenneth Galbraith explains it this way:

This process, once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.

For built into this situation is the eventual and inevitable fall.

The hedge fund players sit with one hand on the eject button and think they will be smart enough to get out before less sophisticated investors lay in the wreckage.

     Love you, love you, you, you, always
     (Always forever love you)
     Ever, ever, ever, forever
     (Always forever love you)

We will “always and forever” love this song by Luther Vandross. We believe investors will suffer numerous bouts of infatuation with technology like the episode in the 1990s and the last ten years. Our job is to invest in meritorious businesses when they are deeply out of favor, knowing that some of them will one day be a part of the kind of favor today’s tech behemoths are enjoying! Fear stock market failure.