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Over the last so many years, we have seen several bubbles, such as
dotcom bubble, commodity bubble, housing bubble, etc.
Participating in these bubbles proved very costly.
So, a question arises, can one know when there is a bubble?
Is it worth taking an effort to avoid them?
Does this amount to "timing the market" (applied to various markets)?
To me, the answer to all of the above is yes.
I think that one cannot predict the little moves and every day
fluctuations. But a person armed with common sense, and a bullshit
detector, can stay out of most trouble. If there is too much hype
surrounding some asset, too many pundits saying that it can only go
up, etc, and not too bright people are making money, especially with
borrowed money, this could be a time to consider staying away.
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I'm just an average Joe, though averse to plumbing. But I've known
that it would all blow up the moment I saw people taking ARMs while
the interests rates were the lowest in history and even interest-only
mortgages. I knew it would blow up in their faces when their ARMs
would expire the "grace-period" or when they would have to start
paying the principal. I just had no idea that it would blow up in my
face too (that comes from being a Joe), though my mortgage payment is
currently less than what rent would cost.
If I can learn anything from this housing bubble and from the .com
bubble, I think is that when people are confident that prices or value
can only go in one direction, people stop assessing goods
realistically. Rather, wishful thinking about value is the norm. It
seems that bubbles have been like this since the tulip frenzy in the
1600s.
It also seems to be the case that bubbles take place with non-
productive goods, be them tulips, a piece of software that everyone
will want one day, or a house larger than one needs. It's true that
economic value is something subjective, but the necessities of life
usually trump what is merely to caress one's ego. In other words,
goods which can be used to contribute to the economic output are the
ones that we will value at the end of the day, ignoring the colors of
tulips, the bells and whistles from a computer or the empty spaces of
a large cardboard house.
Reality has this thing about kicking in sooner or later, when everyone
realizes that the king has no clothes, only to realize that their own
clothes are perhaps all they have.
HTH
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Igor Chudov <i...@a...com> wrote:
> If...
snip for brevity
> not too bright people are making money, especially with
> borrowed money, this could be a time to consider staying away.
I think the above in particular is a good warning sign. It brought to
mind very precisely the commentary by Jason Zweig, in the latest
edition of Ben Graham's _Intelligent Investor_, after Chapter 1,
concerning speculators. Zweig comments on the late 90s bubble and how
trading by specific people with little sophistication in stocks was a
sign that the masses were speculating, not investing.
For the interested reader, a link to Graham's Chapter 1 and Zweig's
comments:
http://web3.streamhoster.com/idstaff/pdf/ebookexcerp
ts/9780060583286.pdf
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Augustine <e...@m...com> wrote:
>If I can learn anything from this housing bubble and from the .com
>bubble, I think is that when people are confident that prices or value
>can only go in one direction, people stop assessing goods
>realistically. Rather, wishful thinking about value is the norm. It
>seems that bubbles have been like this since the tulip frenzy in the
>1600s.
The classic book on bubbles is Extraordinary Popular Delusions and the Madness
of Crowds by Charles MacKay. It discusses bubbles all the way back to the tulip
craze. Read it and bubbles become real easy to recognize.
http://www.amazon.com/Extraordinary-Popular-Delusion
s-Madness-Crowds/dp/1890151408
-- Doug
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Augustine <e...@m...com> wrote:
>It also seems to be the case that bubbles take place with non-
>productive goods, be them tulips, a piece of software that everyone
>will want one day, or a house larger than one needs. It's true that
>economic value is something subjective, but the necessities of life
>usually trump what is merely to caress one's ego. In other words,
>goods which can be used to contribute to the economic output are the
>ones that we will value at the end of the day, ignoring the colors of
>tulips, the bells and whistles from a computer or the empty spaces of
>a large cardboard house.
We are coming off an oil bubble, so it doesn't just apply to non-productive
goods. -- Doug
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On 2008-10-21, Douglas Johnson <p...@c...com> wrote:
> Augustine <e...@m...com> wrote:
>
>>If I can learn anything from this housing bubble and from the .com
>>bubble, I think is that when people are confident that prices or value
>>can only go in one direction, people stop assessing goods
>>realistically. Rather, wishful thinking about value is the norm. It
>>seems that bubbles have been like this since the tulip frenzy in the
>>1600s.
>
> The classic book on bubbles is Extraordinary Popular Delusions and the Madness
> of Crowds by Charles MacKay. It discusses bubbles all the way back to the tulip
> craze. Read it and bubbles become real easy to recognize.
>
> http://www.amazon.com/Extraordinary-Popular-Delusion
s-Madness-Crowds/dp/1890151408
>
This is a must read book for any investor. If I remember right, I read
it 1996.
--
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On 2008-10-21, Augustine <e...@m...com> wrote:
> I'm just an average Joe, though averse to plumbing. But I've known
> that it would all blow up the moment I saw people taking ARMs while
> the interests rates were the lowest in history and even interest-only
> mortgages. I knew it would blow up in their faces when their ARMs
> would expire the "grace-period" or when they would have to start
> paying the principal. I just had no idea that it would blow up in my
> face too (that comes from being a Joe), though my mortgage payment is
> currently less than what rent would cost.
Augustine, I snipped the rest of your post for brevity, but I want to
say that it was a great post, as far as I am concerned. I think that
besides recognizing a bubble in progress, which you described, one
also need some degree of strength to stay away from bubbles and not
get suckered into the "I will get out early" mentality.
i
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On Oct 21, 1:31 pm, Douglas Johnson <p...@c...com> wrote:
>
> We are coming off an oil bubble, so it doesn't just apply to non-productive
> goods. -- Doug
That's true. But I wonder about the scope of oil speculation. It
surely affects everyone, but only on the way up, not on the way down.
In other words, it seldom went up catastrophically and it never came
down like that, at least for those who use it, not sell it.
Could this pattern be applied to all productive goods?
Then again, as the OP said, the bubbles were particularly
characterized by credit beyond one's means and disposable assets. Is
this always true?
TIA
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On Oct 21, 3:50 am, Igor Chudov <i...@a...com> wrote:
> So, a question arises, can one know when there is a bubble?
>
> Is it worth taking an effort to avoid them?
Learn to love bubbles, at least the more limited ones without
collateral damage! Like the China one... very easy to recognize
joining for some upside and not that hard to tell when to get off
before getting all gains zeroed out
It's just hard to resist rejoining such things during the bear
rallies. You only need a little luck in not joining too late, and
discipline in getting out (trailing loss sell order, and then off to
money market or an alternative bubble)
Well, that's a bit extreme just to make a point, and most bubbles
should probably be treated as toxic. But where would most of us be if
not for some of the more mellow bubbles? If I had depended on SP500
indexing I would be not only poorer but would have mentally numbed my
interest in finance.
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On Oct 21, 11:10 am, Douglas Johnson <p...@c...com> wrote:
> The classic book on bubbles is Extraordinary Popular Delusions and the Madness
> of Crowds by Charles MacKay. It discusses bubbles all the way back to the tulip
> craze. Read it and bubbles become real easy to recognize.
>
> http://www.amazon.com/Extraordinary-Popular-Delusion
s-Madness-Crowds/...
I beg to differ. It's difficult to recognize bubbles in progress.
For example, many of us saw there was a real estate bubble (if you
lived on either coast, this was clear) but how many saw that this
bubble would pop and implode fixed-income investments? Very very
few. Almost nobody I would argue, except a few Wall Street bond
analysts talking to their fellow analysts in private, and even then
just speculating.
As for MacKay's book, it's been debunked (I think Kindelberger has
written on this) by a late 1980s revisionist author who points out
that certain tulips were indeed very rare and worth what people were
paying for them--precisely the same way as a rare gem is worth a lot
of money. Also, the prices were not as extreme as people suggest,
further, certain stories are apocryphal (like the starving drunk
sailor who ate a rare tulip for lunch), and finally, there were two
different tulip markets: one where you had to put down a real down
payment for an actual tulip, a kind of futures market, and another,
akin to today's derivatives, which was not based on any physical
underlying tulip, but a gamble on which way prices would move. Poor
people speculated, with no down payment (sound familiar? like our Alt-
A "NINJA" mortgage loans), on the latter market, which had no basis in
reality and quickly became overinflated. It is this market that
people call the tulip market, but, as the revisionist pointed out, it
was by far the less important market commercially. The rich and real
merchants only invested in the first market.
RL
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