Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 591

Is FOMO overruling investment basics?

Four years ago, we introduced our 'bubbles' chart to show how the market had become concentrated in one type of stock and one view of the future. The chart maps every stock in the MSCI World Index, with the size of each bubble representing a stock’s weight in the Index. Cheaper stocks are on the left, and richer ones on the right, with defensives at the bottom and cyclicals at the top.

In 2020, we wrote that the market had become concentrated in the 'defensive growth' quadrant on the bottom right, particularly among lockdown beneficiaries, like Netflix and Amazon, whose positions looked unassailable.

That period also saw the rise of pandemic darlings such as Zoom and Peloton—where valuations looked exuberant to say the least. At one point, the exercise bike maker was valued more highly than Honda Motor, the world’s largest motorbike maker (and a pretty big automaker too). The prices of lockdown darlings subsequently collapsed, as did those of speculative SPACs, meme stocks, non-fungible tokens, and hundreds of crypto currencies.

Over the past year, some of that market exuberance has returned. In equities, artificial intelligence is now the dominant theme, but signs of froth abound, spurred by the US election. Bitcoin’s price has blown past previous records. Tesla, which a few months ago was facing relegation from the Magnificent Seven, has added $200bn to its market value since the election—despite earnings expectations declining. And, thanks to the Tesla CEO’s role at the new Department of Government Efficiency, or DOGE, the joke cryptocurrency dogecoin has seen its price surge by 150%.

All that to say, while much has changed since 2020, much remains the same. A few years on, our bubbles chart tells the same story, and today over 60% of the World Index sits in the 'defensive growth' quadrant. Investors remain focused on one theme and one view of the future, and seem more afraid of missing out than losing money.

Alternatives that can deliver returns

So what is an active investor to do? Some are becoming active with passive characteristics—we have heard several cases of investors simply buying the Magnificent Seven to the index weight, a decision that explicitly ignores price and fundamentals. Providers of exchange traded funds are making that easier, introducing super concentrated funds that only own the biggest stocks. Throwing investing basics out the window does not typically end well.

The global stock market is a big place, and we think it’s unlikely that the most richly-valued part of it has a monopoly on good opportunities. In contrast, our bottom-up process has uncovered opportunities across all four corners of the market—the blue bubbles in the chart.

As a sample, the Korean banks sit across the 'value cyclical' and 'value defensive' buckets. Some quality companies like Nintendo are in the 'growth cyclical' quadrant, while a handful of owner-led businesses such as Corpay, RXO, GXO, and XPO sit in the 'growth defensive' bucket.

Rather than being concentrated in similar stocks, our portfolio is well diversified across characteristics, regions, and sectors. Crucially, we believe that every stock in the portfolio trades at a discount to its intrinsic value. In many cases, we are paying low price-to-earnings multiples on cyclically depressed earnings. Such stocks offer the potential for a double win, as both earnings and valuations recover. This stands in stark contrast to some of the high-flying stocks in the Index, where expectations for stellar growth are already baked into the price. Paying a high multiple on cyclically high earnings is a dangerous game.

 

Eric Marais is an Investment Counsellor at Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances. For more articles and papers from Orbis, please click here.

 

  •   18 December 2024
  • 1
  •      
  •   

RELATED ARTICLES

Finding the next 100-Bagger

‘Super-defensive equities’ may rescue struggling 60/40 portfolios

Changing landscape of US large and mid caps

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.