Ten quotes on the question of financial bubbles
- January 14th, 2014
Eddy Elfenbein, “A bubble is a bull market in which you don’t have a position.” (Twitter)
Eddy’s comment is a clever one because it captures the current zeitgeist that involves calling any significant market move a bubble. As Barry Ritholtz has said we seem awash in a “bubble of bubbles.” As the stock market continued to make new highs throughout 2013 (and early 2014) the idea that the stock market was in a bubble became a popular topic in the financial media and blogosphere. As Phil Pearlman notes this is due in large part to our emotional proximity to recent bubbles. Instead of rehashing all of the arguments pro (and con) I thought it would be interesting to pull some quotes from some recent posts on the idea of bubble I thought were interesting. So in no particular order:
Justin Fox, “Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price.” (HBR)
Jason Zweig, “Another sign to watch for: In every bubble, there are always people trying to burst it by declaring that financial assets have become overvalued. At first, Prof. Goetzmann says, such skeptics earn respectful attention. But eventually, investors turn on them with anger and ridicule.” (WSJ)
Richard Bernstein, “In his wonderful book, Devil Take the Hindmost, Edward Chancellor demonstrates that financial bubbles tend to follow similar patterns. Most important, his work suggests that valuation alone does not constitute a financial bubble. Financial bubbles go beyond the financial markets and tend to pervade society.” (Richard Bernstein Advisors)
Barry Ritholtz, “I am hard-pressed to recall when any sort of bubble was accurately identified in real time on the cover of a major media publication. If anything, the opposite is true.” (Big Picture)
Doug Kass, “When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.” (TheStreet)
Phil Pearlman, “So we had these two gigantic bubbles and we were all affected and the culture was affected and yet we don’t really acknowledge how affected we were and how the remnants of those events shade our interpretations of present experiences.” (Phil Pearlman)
Greg Harmon, “Every market that is rising quickly is not a bubble. And any market that has rising for a long time and is not falling (bonds) is also not necessarily a bubble. They could be but you will never know ahead of time. Instead why not just continue to follow the existing trends and not worry about bubbles.” (Dragonfly Capital)
Morgan Housel, “If the history of bubbles teaches us anything, it’s to be humble…Fama doesn’t think we can predict bubbles. Shiller thinks we can, but doesn’t think we can ever know when they’ll collapse. What we need, but I know we’ll never get, is more of this type of thinking. I’m holding out for a humility bubble. “ (Motley Fool)
Robert Shiller, “Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.” (Project Syndicate)
I spent an entire section of my book , Abnormal Returns: Winning Strategies from the Frontlines of the Financial Blogosphere talking about bubbles and how they change our perceptions. I would agree with Greg Harmon that time spent on sussing out bubbles instead of focusing your portfolio management methodology is likely wasted time. One of the ways to gird yourself against bubbles is to spend some time learning about financial history, because as Barry notes bubbles are really only identified in hindsight. As I noted in my book:
The great challenge of bubbles is that they can really only be identified in hindsight. A bubble-like market can remain aloft far longer than its detractors can believe. As long as the market’s apogee is still unknown, there is always a ready source of market defenders. It takes the passage of time and a clear peak in price to convince the vast majority of market participants that a bubble did indeed take place.
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