We See Dead Stocks

Financial euphoria episodes are a common occurrence in investment markets and the U.S. stock market. When a new one comes along, market participants accelerate their enthusiasm toward the end, which makes the shares of companies involved dead to us. The new mania becomes comparable to prior episodes (see the chart below) and prepares to destroy the capital of those who extrapolate the existing trends and enthusiasm.


Source: BofA Merrill Lynch. Data for the time period 1/1/1977 – 12/31/2018.

One of our favorite movies of the last 25 years is the thriller, The Sixth Sense. It is the story of a little boy, Cole, who is haunted by the regular appearance of dead people. He is visited by an expert psychologist, played by actor Bruce Willis, who hears the boy say, “I see dead people.” In the current stock market, we feel somewhat like the little boy because we see dead stocks. Dead stocks to us are ones which could spend ten years or more just trying to get back to the highs of the euphoria episode.

We regularly revisit the agony which comes in the aftermath of manic euphoria episodes in the stock market over the last 60 years, because we have no urge to own stocks which make us hide in the bedroom like little Cole did in the movie. Therefore, is the decline in the most popular tech stocks in the last four months a temporary interruption in their long climb to complete dominance of the stock indexes and the U.S. economy? Or is ownership of them a ticket to future misery? Do violent rallies along the way tell you anything about whether the stocks are going to be dead for a while? Lastly, what does this mean for stock pickers like us and asset allocators who need U.S. large-cap equity exposure? Are you willing to be visited by ghosts?

There are two kinds of dead stocks late in a euphoric era. The first kind of dead stocks are the companies which gain heavy favor in the mania but end up being complete failures in their business, whose shares collapse completely. In the Nifty-Fifty mania of the late 1960s and early 1970s, the dead stocks which failed completely were names like Simplicity Pattern, S.S. Kresge (K Mart) and Polaroid. The dot-com tech bubble gave us Sun Microsystems, Lucent Technologies, AOL and a host of others which ended up in the dust bin.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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Cynthia Decker 3 months ago Member's comment

Great title.