Take a piece of paper that is, say, 1/100 of an inch thick and fold it over. Now take it and fold it over again -- and again and again -- until you have folded it 50 times. The folded-up piece of paper you ended up with would be 177,698,849 miles high -- nearly twice the distance of the Earth to the sun.
Now take a stock trading at $100 a share. Add 1% to it every trading day for a year. At the end of the year, it will be trading at more than $1,200.
That's what momentum is about: an investing style that presumes past performance actually
guarantee future results. It does not matter that such exponential returns are supposed to be as unrealizable as that folded-over paper is.
Dash down some thoughts on our Nasdaq board
has soared 64% this year, much of it in the past month. Much of the gain has come on the back of a handful of stocks whose stunning performance in 1999 has lately become stratospheric -- in the absence of any meaningful change in the fundamental conditions those companies operate in.
In recent weeks, even more money has been stampeding into the stocks -- mostly concentrated in information technology -- that have put on the best performances of the year, sending them higher still. Price targets are blown through; price targets are reset. A portfolio manager speaks frankly about how he thinks an $80 stock will be at $100 in short order. Traditional views of valuation get scoffed at.
It is the late 20th century and it is America, and Wall Street has embraced the mathematics of the impossible.
"These things have become parabolic," says Stanley Nabi, chief investment officer at
Donaldson Lufkin & Jenrette
. "What we have right here is an artificial market."
No, it is not the first time momentum has come to roost in the stock market. Nor is it the first time stocks have grown at a viral rate. But never before have so many large-capitalization stocks moved like this, and never have so many investors chased the move. This ain't
, the music company
Internet play that individual investors sent up and down while the institutional money smirked. This is a game that everyone is playing.
"Investors are just deciding where to place their money based on momentum," says Dan Mathisson, head stock trader at
D.E. Shaw Securities
. "You see little guys and institutional guys jumping in and saying we just have to be where things are hot."
It's a point worth making again and again. It isn't just about daytraders. Big money is moving these stocks. Tuesday,
rose 24%. Yet online investors on
were net sellers of the stock -- selling, happily one supposes, to institutional investors.
Perhaps institutions have joined the fray here because it is clear that something amazing is happening in technology. Telecommunications and the Internet are growing explosively. Moreover, these are clearly real companies, many of which already have real earnings.
-- which has gained better than 20% in the last week -- does
. So does
-- which added better than 35% in the last week.
Short on Opposition
It is easy to be a Cassandra about these things, to say that one day these investors will get their comeuppance. And even the most bullishly inclined will admit that the exponential run cannot go on forever, that one day prices will not be able to go up anymore. But nobody is short these stocks anymore -- anyone who was has gotten blown out of the water -- and that means the only money left in the game is long. As a result, says Mathisson, "there's a much larger community of people that want to goose these. It's hard to say how long it will continue, or when it will end."
Meanwhile, money managers who worry about the valuations of the momentum stocks are coming under heavy pressure.
"I'm an investment manager," says DLJ's Nabi, "and I am told all the time by my clients, 'I don't give a damn that you don't care for these stocks.'" But Nabi worries that if he does that, he will have broken his fiduciary responsibility to run money in the manner he said it would. And if these stocks crack, as he at least reckons they eventually will, he will get angry calls from clients and letters from their lawyers.
"I know," he says, "that memory is a selective thing."
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