Chart of the week
In Memoriam
What does this chart show?
In October 2020 the market capitalization of Zoom was $159B, surpassing that of ExxonMobil. A year and a half later, just months after Russia invaded Ukraine and with inflation at 8.3%, the market capitalization of ExxonMobil was $360B, 11x that of Zoom.
Why does it matter?
During turbulent and uncertain times in the market it’s helpful to take a step back, away from ‘the fog of war’, and recall that over the short term the prices of stocks can become completely detached from fundamentals and economic reality. If things seem preposterous, either they are, or something has changed for good. Of course this is easy to say with the benefit of hindsight.
It’s possible to participate in the periodic gains shown from both Zoom and Exxon during periods in this chart in an unemotional and rules based fashion by allocating to high quality, concentrated momentum strategies. The momentum factor is a rigorously studied, persistent and pervasive factor in returns of stocks and other assets1. Put simply, winners tend to keep winning, and losers tend to keep on losing2. A high quality momentum strategy will systematically allocate to stocks that exhibit a “hot-hand” over intermediate time frames (6-12 months) and sell those stocks when they no longer exhibit such characteristics. Note that this isn’t a panacea, and can exhibit significant tracking error, but it is an undeniable phenomenon that has been successful over decades in practice and academic research. See more here.
The Bottom Line
There may be no chart that captures the essence of the COVID speculative investing mania better than this one. It’s the chart for the history books.
Chart & Data Sources - The Financial Times, FactSet, and Alpha Architect