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The Bubble Index

Bubbles are another way of saying 'investments with positive price momentum' - perhaps they are worth their own index, Morningstar's John Rekenthaler wonders

John Rekenthaler, CFA 01 August, 2019 | 8:00
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In early 2017, Bloomberg editor Joe Wiesenthal tweeted, “A good ETF would be to take companies/markets that journalists say are in a bubble and then to go long them.” A portfolio manager at the investment firm GAM, Paul McNamara, took up the challenge, and created a hypothetical portfolio of oft-derided securities. Among them were Tesla (TSLA) and Netflix (NFLX), a bitcoin fund, long bonds, a Chinese real estate trust, and an exchange-traded note that shorted U.S. stock volatility.

The Bubble Portfolio gained 80% for the rest of 2017, dropped 23% the following year (its short-volatility note liquidated after losing more than 90% of its value), and has rebounded to gain 17% in the first five months of this year. That makes for a 25%-plus annualized return (I can’t state precisely, as I don’t have the portfolio’s official start date), albeit with some significant variability.

Ink-stained Wretches
The media, cannibals that they are, did not miss the opportunity to consume their own. CCN’s Mark Emem wrote, “If the bubble portfolio serves any useful purpose, it is to prove that the mainstream media gets it mostly wrong when it comes to picking overvalued assets.” ForexTV.com stated, “Here’s what happens when you buy assets that journalists warn are in a bubble.” Bloomberg’s Matt Levine asked, “What on earth do journalists, no offense, have to recommend them”

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About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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