When does a bubble spell trouble?

Baley

It's about investor psychology and happens when investors "pay too much to be right" (doesn't matter much what they invest in at bubble prices)

lesson: do not become romantically involved with your investments, even if you're positive you will end up "right" about how wonderful an idea it is,
and how sure you are that you know more than the current market about its value

Baley

“Once people buy in, they start to discount evidence that challenges them,” Prof. Goetzmann says. “There seems to be a hinge point where investors go from thinking about quantifying economic trade-offs to a kind of binary framework where anybody who disagrees with them is demonized,” he says.

That is when a bubble becomes trouble.

Baley

“When everyone starts to use ‘bubble’ anytime prices go up, it’s probably not one,” says Jason Hsu, chief investment officer at Research Affiliates, a firm in Newport Beach, Calif., whose investment strategies are used to manage approximately $150 billion in assets. “The time to worry is when people are using all kinds of rationalizations as to why it’s not a bubble.”

derryb

as in debt bubbles?

MGLICKER

<< <i>“When everyone starts to use ‘bubble’ anytime prices go up, it’s probably not one,” says Jason Hsu, chief investment officer at Research Affiliates, a firm in Newport Beach, Calif., whose investment strategies are used to manage approximately $150 billion in assets. “The time to worry is when people are using all kinds of rationalizations as to why it’s not a bubble.” >>



Considering the last several high flying and hard dropping markets (stocks, housing and PM's) the one thing is certain is that everyone is never, ever in agreement.

This fed manipulated stock market is quite an educational experience. I believe that most followers think that it is too high, but don't want to miss the move. Others think that it is fairly valued or close to it. Few seem to think that it is undervalued.

Baley

<< <i>

<< <i>“When everyone starts to use ‘bubble’ anytime prices go up, it’s probably not one,” says Jason Hsu, chief investment officer at Research Affiliates, a firm in Newport Beach, Calif., whose investment strategies are used to manage approximately $150 billion in assets. “The time to worry is when people are using all kinds of rationalizations as to why it’s not a bubble.” >>



Considering the last several high flying and hard dropping markets (stocks, housing and PM's) the one thing is certain is that everyone is never, ever in agreement.

This fed manipulated stock market is quite an educational experience. I believe that most followers think that it is too high, but don't want to miss the move. Others think that it is fairly valued or close to it. Few seem to think that it is undervalued. >>



Some folks might even believe that some of the thousands of stocks of individual companies are overvalued versus what they will be worth in the future, while other stocks are undervalued, and still others are fairly valued. These investors to not believe that "the stock market" is one thing in which the individual components all move together, nor do they believe that movements of the average value of "the stock market" indexes (or any other market) is entirely a result of government interference. They know that the buy and sell decisions of thousands, millions of market participants over time result in the aggregate movements in the values of the population of securities

Similarly, is "the coin market" over-, under- or fairly valued, versus what it will be valued at tomorrow, next year or in 5 or 10 year?

a rational person may realize that the average will move around over time periods and economic cycles, both up and down, while some components move far higher, and others far lower, as buyers and sellers change their minds and either buy or sell the component coins.

realizing this, someone may not go "all in" or "all out" in a sector, even to an extreme such as selling their house and uprooting their family renting instead, just because they think the housing market will fall. However, most, instead, "ride it out" long term, the changing "value" of their house not being a primary consideration. But owning a house to live in is a binary thing, either someone does or they do not...

on the other hand, someone may invest some (but not all) of their assets in precious metals and stocks in the long term, building positions over time, and buying more when prices are lower, and selling some but not all when prices are higher. If one is "out" of metals or the stock market, naturally they will not have any to sell when prices for them are high. Likewise, if one is always fully invested in one or the other asset class and has no cash or other asset that is high when their asset is low, they do not have funds to buy at the lower prices, because they were fully invested when the prices went down.

anyway, all that said, I do believe "the stock market" is in a bubble and will correct at some point, just as all markets do. Houses were not immune, metals were not immune, bonds and stocks will not be immune. this time is not different. And when the stock and bond market corrects, there will be money there to slow the decline and buy the averages back up, eventually, just like happened with houses and metals.

MGLICKER

<< <i>Similarly, is "the coin market" over-, under- or fairly valued, versus what it will be valued at tomorrow, next year or in 5 or 10 year? >>



You make a good point about the stock market being a large number of individual entities with different perceptions of value. I forget that myself sometimes.

Coin market is a bit tougher to quantify. Unlike gold and silver and housing which have a measurable production cost, rare coins do not (fake Chinese knockoffs being the exception).

Equities, especially established so called blue chips have measurable income and dividend distribution. Some of the Nasdaq high flyers are trickier as revenue and income is often a bong dream. Take Amazon. Good company, but compared to Wal-Mart, AMZN sells for four times the revenue multiple. And Walmart earns a healthy profit. Amazon virtually none.