Investors should avoid the temptation to buy the dips in expensive high-growth stocks because “once the fever breaks, it lasts a long time,” according to Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.
Slimmon joined the “What Goes Up” podcast to discuss what he’s investing in these days. He also explains how the MSIF U.S. Core Portfolio fund he co-manages beat the S&P 500 with a 36% gain in 2021.
Below are the condensed and lightly edited highlights of the conversation.
Q. You wrote to us before the show, saying “avoid the temptation to step in and buy into the selloff in high-growth stocks.” You said, “my experience is: Once the fever breaks, it’s done for quite a while.”
Historically, is there any precedent you could point to? Is it too simple to point to the dot-com bubble as a fair comparison?
A. So first of all, I just want to make sure it’s understood: I’m not a value manager, or a growth manager. I’m not trying to, you know, spin what works or what my investment philosophy is at all times. I’m just looking at what the fat pitch is.
And as it pertains to this group, the reason why I believe once the fever breaks, it lasts a long time, is if you wind the clock back, if you look at some of these uber-growth funds back to where they were in early fall of 2020, that means a lot of people haven’t made money, right? Because they chased into them after they peaked.
And the reason why the dot-com analogy is correct is that that means that every time they start to go up, there’s someone that can get out even. And so there’s tremendous selling resistance at higher levels because so many people have lost money.
And that to me is very similar to the dot-com bubble, and other bubbles. Once a very speculative bubble breaks, it’s not a V bottom because there’s too many people looking to get out.
Q. So what cohort would you look at? Could you see the Nasdaq 100 going down as much as it did then, or more like a Cathie Wood-type of fund?
A. That’s the difference to 2000. In 2000, the Nasdaq had obscene prices. You also had some of these very big-cap tech stocks trading at triple-digit multiples.
And when I look at these uber-growth stocks, they’re expensive as they were in 2000, but the main tech stocks, the Nasdaq 100, the big stocks, they’re not as expensive. So I don’t think the (comparison to the) Nasdaq break of 2000 is quite accurate because I don’t think the really big tech stocks are as vulnerable.
Q. One thing I always think about along these lines is that there’s something in human nature that is always going to make that instinct to chase the high flyers come back at some point.
Q. Yeah, right. As simple as that. But what are the conditions you would look for to be in place to bring that trade back?
A. Well, I think it’s first seller exhaustion, where stocks stop going down on bad news because there’s no one left to sell them. And I’m just not sure we’re there yet. I haven’t seen big capitulation. I mean, the stocks are down a lot, but there hasn’t been big capitulation in these stocks.
The other way I think about it is when no one believes that they can buy the dip anymore. That’s when the bottom happens, right? When people say, “I don’t wanna touch them. These are uninvestible,” that’s when I get interested.
But when people are saying, “Hey, well, what do you think?” Because the memory of making a lot of money is too recent and that leads people to try to bottom fish.
I’ve been in this business a long time. Human behavior doesn’t change.
And so when this type of bubble breaks, you get counter-trend rallies and they go up a little bit and then they go down low and then they go up and they go down until people say, “Don’t ask me one more thing about it. I don’t want to talk about it. Moving on.” And then I go, “Oh, that’s kind of interesting.” That means maybe they’re getting to a bottom.