Quote for the Week

Despite its irrational aspects, the internet boom was more than a matter of inflated valuations. The optimism of the financial markets not only changed the “fundamentals” of individual businesses, it had real and profound effects throughout the whole economy. The boom did not only follow from the development of the internet; it accelerated that development and contributed to the speed and extension of technological innovation. The same was true in telecommunications, where the boom also accelerated the spread of new technology.

The internet bust, when it finally came, was caused not by an unsound business model, but by over-extension of credit. The present slowdown is affecting the fundamentals of individual companies almost as much as their stock prices; it also affects the financial system and macroeconomic performance.

Instead of a one-way connection in which financial markets discount the future more or less accurately, there exists a two-way connection in which financial markets shape the future they are supposed to discount. Instead of a single outcome, there is a range of possibilities. Which of those possibilities materializes depends not only on the future evolution of the so-called fundamentals but on financial market behavior as well.

In these circumstances, it is irrational for market participants to base their decisions solely on their expectations about fundamentals because the fundamentals do not determine market prices; on the contrary, they are shaped by market conditions. So what matters to market participants is the future course of market prices, not the fundamentals they are said to reflect. If market prices deviate from a theoretical equilibrium there can be no assurance that they will ever return to it. — George Soros (source)

Markets in 2025 started with a tariff tantrum that recovered and rallied the rest of the year. International markets shrugged off the tantrum quicker, rallied, and outpaced the US by a wide margin.

In addition, there was an AI Bubble, comparisons to the Dotcom Bubble, the return of SPACs, Bitcoin holding companies, private market funds for the masses, single stock levered ETFs, and more. A smorgasbord of speculative investments was introduced this year. Not unlike in 2020 and 2021. It didn’t turn out well then (It was brutal). Will this time be different? Time will tell.

With that, let’s get to the charts. Here’s how things started.

And how it’s ending.

Quotes for the Week

Before I came down to Wall Street in 1914 the future of the stock market had already been forecast — once for all — in the famous dictum of J.P. Morgan the elder: “It will fluctuate.” It is a safe prediction for me to make that, in future years as in the past, common stocks will advance too far and decline too far, and that investors, like speculators — and institutions, like individuals — will have their periods of enchantment and disenchantment with equities. — Ben Graham (source)

When disagreement and controversy exist, prices move slowly because buyers and sellers roughly offset each other. When, on the other hand, a consensus exists, prices move rapidly, because buyers can find no one to buy at current levels (and vice versa with sellers on the way down). — Peter Bernstein (source)

Quote for the Week

Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance. And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified…

Can you manage yourself in a bubble, and can you manage yourself on the other side? It’s very easy to say yes when you haven’t been there. But it’s very hot in that oven. And can you save your ego, as well as your wealth? I think I might have just said something important. Your wealth is like your children — the primary link between your present and the future. You should try to think about it in the same way. You want your children to have freedom but you also want them to be good people who can take care of themselves. You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing. — Peter Bernstein (source)