"Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down."
- Short sellers are "killed. You don't hear about them anymore." Anyone investing in short-only funds suffers "general embarrassment";
- Long-only managers "are getting butchered for conservatism". Merkel cites early 2000, when Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all quit "shortly before the market top";
- Value investors start to accumulate cash. "Warren Buffett is an example of this," says Merkel. "When Buffett said that he 'didn't get tech,' he did not mean that he didn't understand technology; he just couldn't understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.";
- Growth managers beat value managers. Because, "in short, the future prospects of firms become the dominant means of setting market prices.";
- Momentum strategies "are self-reinforcing due to an abundance of momentum investors...Actual price volatility increases. Trends tend to maintain themselves over longer periods," and sell-offs are quickly recovered;
- Markets start to "favour inexperienced investors," who simply follow the trend. Merkel's favourite sign is to check CNBC and "gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous." More experienced investors instead expect reversion to the mean.