Question on bubbles, stocks, etc.

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kayanco
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Question on bubbles, stocks, etc.

Post by kayanco » Sat Sep 09, 2017 11:05 pm

For folks well-versed in the history of bubbles such as the tulip mania, south sea, dot com, and any others, I'd like to ask:
What was the maximum return anyone could have gotten in any bubble for a 100 dollars? i.e. If someone put in $100 at the beginning (or lowest point), how much would it be at the peak? Can only get in once and get out once.

I'm not looking for the return in each bubble, but which bubble had the highest return (with hindsight and perfect timing).

Thanks.
Last edited by kayanco on Sun Sep 10, 2017 4:04 pm, edited 2 times in total.

AlohaJoe
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Re: Question on bubbles, stocks, etc.

Post by AlohaJoe » Sat Sep 09, 2017 11:41 pm

kayanco wrote:
Sat Sep 09, 2017 11:05 pm
For folks well-versed in the history of bubbles such as the tulip mania, south sea, dot com, and any others, I'd like to ask:
What was the maximum return someone could get for a 100 dollars? i.e. If someone put in $100 at the beginning, how much would it have been worth at the peak?
I'm not sure about what your exact question actually is. Are you asking someone to generate a list of every bubble and how much $100 would have been worth at the peak for that bubble? It seems like that's the kind of thing you could (and should) be doing yourself since it only requires a bit of Googling.

If instead you're asking "what is the best investment of all time, assuming you could have market timed it perfectly and sold at the peak" ... that's a very different question. I'll answer this one...

The maximum return wouldn't have come from any of those bubbles. During things like the South Seas bubble and Tulip mania, prices went up 10-30x. So $100 would have turned into $1,000 to $3,000.

However, just putting $100 into the boring S&P 500 in 1977 would have given you way more money than investing in the South Seas or Tulips. Admittedly, it would have taken 40 years instead of 2. But then there are things like Manhattan Island, the Louisiana Purchase, and "Seward's Folly" that all turned $100 into far more money than Tulip-mania. I reckon even the Florida land property mania of the 1920s would have turned out pretty well for anyone who held on until the present day. Then think about $100 in Google or Facebook on Day 1. Or $100 invested with the Vanderbilts or Rothschilds when they first got started.

All of the get rich fast schemes aren't about getting rich, which is (in the grand scheme of things "relatively") easy to do if you are patient and willing to spend a few decades at it -- after all Buffet didn't become a billionaire until he was in his 50s; he started investing as a teenager and it still took him 4 decades. All those schemes focus on the "fast" part.

mnaspbh
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Re: Question on bubbles, stocks, etc.

Post by mnaspbh » Sat Sep 09, 2017 11:55 pm

How do you define "the beginning" of a bubble? Are you allowing for leverage, options trading, or short selling? If not, why not? What about multiple trades? Many bubbles get "frothy" before they burst, where an omniscient trader could make more through selling and buying back than just selling once at the peak.

If you're trying to work out how to maximize your return on $100 when you fire up your time machine, be careful. You may be better off making a bunch of high-risk transactions where most of them lose but enough win big to make you however much you need to buy the supplies you need to get home. Otherwise, the SEC's TTDU (time traveler detection unit) will probably catch you. :wink:

Valuethinker
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Re: Question on bubbles, stocks, etc.

Post by Valuethinker » Sun Sep 10, 2017 8:06 am

AlohaJoe wrote:
Sat Sep 09, 2017 11:41 pm
kayanco wrote:
Sat Sep 09, 2017 11:05 pm
For folks well-versed in the history of bubbles such as the tulip mania, south sea, dot com, and any others, I'd like to ask:
What was the maximum return someone could get for a 100 dollars? i.e. If someone put in $100 at the beginning, how much would it have been worth at the peak?
I'm not sure about what your exact question actually is. Are you asking someone to generate a list of every bubble and how much $100 would have been worth at the peak for that bubble? It seems like that's the kind of thing you could (and should) be doing yourself since it only requires a bit of Googling.

If instead you're asking "what is the best investment of all time, assuming you could have market timed it perfectly and sold at the peak" ... that's a very different question. I'll answer this one...

The maximum return wouldn't have come from any of those bubbles. During things like the South Seas bubble and Tulip mania, prices went up 10-30x. So $100 would have turned into $1,000 to $3,000.

However, just putting $100 into the boring S&P 500 in 1977 would have given you way more money than investing in the South Seas or Tulips. Admittedly, it would have taken 40 years instead of 2. But then there are things like Manhattan Island,
I recall reading c. 8% pa return. BTW the original buyers, the Dutch, in turn had it stolen from them by the English.
the Louisiana Purchase, and "Seward's Folly" that all turned $100 into far more money than Tulip-mania. I reckon even the Florida land property mania of the 1920s would have turned out pretty well for anyone who held on until the present day. Then think about $100 in Google or Facebook on Day 1. Or $100 invested with the Vanderbilts or Rothschilds when they first got started.
If you adjusted for inflation, I don't think Florida land prices have done that well. And of course you had to pay property taxes on that land, plus capital gains taxes when you realized. Shiller's data shows what a disappointing investment residential housing has been in the last 150 years (Neil Monnery shows you data back 8 centuries, where we have it). I doubt commercial RE has been that much better-- few commercial RE structures survive 50 years, look at all those empty shopping malls in America, and central city land values have actually lagged, a product of changing technology and relocation of stores and offices to the edges of cities rather than the centres.

Long term return on prime UK farmland is about 1% real, I believe-- say 300 years of data.

US stocks have certainly done better, despite the Crash and the Great Depression.

Rothschilds? You are back in the 1500s I believe. You could not invest with them, per se. Much of their reputation is as bankers, not investors, and whilst I have no doubt Edmund de Rothschild and his current wife Lyn Forrester (an American) make a good living out of NM Rothschild (the investment bank that is private and he controls) it's not exactly Goldman Sachs is it? (GS is the world's largest nearly pure investment bank, although it is legally a bank now).

The Rothschild "investment record" is really about Lord Jacob Rothschild and his Rothschild Investment Trust. These are different Rothschilds-- cousins. That's only been listed for around 40 years, I believe.

Rockefeller would be a better comparison because presumably you could have bought stock in Standard Oil fairly early on. That is why Exxon has 30% individual stockholders, I believe, when the average US co is less than 10%? (It might also be the family). Standard Oil was broken up and Standard Oil of New Jersey became Esso became Exxon became Exxon Mobil.
All of the get rich fast schemes aren't about getting rich, which is (in the grand scheme of things "relatively") easy to do if you are patient and willing to spend a few decades at it -- after all Buffet didn't become a billionaire until he was in his 50s; he started investing as a teenager and it still took him 4 decades. All those schemes focus on the "fast" part.
This I agree with. The power of compound interest takes a long time to work. This is also the source of any value investor's dictum about "don't lose money". Or in Boglheads terms, spend it.

kayanco
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Re: Question on bubbles, stocks, etc.

Post by kayanco » Sun Sep 10, 2017 1:29 pm

AlohaJoe wrote:
Sat Sep 09, 2017 11:41 pm
.. Are you asking someone to generate a list of every bubble and how much $100 would have been worth at the peak for that bubble?..
No, I wouldn't put that burden on you :)
If instead you're asking "what is the best investment of all time, assuming you could have market timed it perfectly and sold at the peak" ...
Yes, exactly this.
However, just putting $100 into the boring S&P 500 in 1977 would have given you way more money than investing in the South Seas or Tulips. Admittedly, it would have taken 40 years instead of 2. But then there are things like Manhattan Island, the Louisiana Purchase, and "Seward's Folly" that all turned $100 into far more money than Tulip-mania. I reckon even the Florida land property mania of the 1920s would have turned out pretty well for anyone who held on until the present day. Then think about $100 in Google or Facebook on Day 1. Or $100 invested with the Vanderbilts or Rothschilds when they first got started.
..
So out of all these, what is the most a $100 could have turned into?

kayanco
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Re: Question on bubbles, stocks, etc.

Post by kayanco » Sun Sep 10, 2017 1:43 pm

mnaspbh wrote:
Sat Sep 09, 2017 11:55 pm
How do you define "the beginning" of a bubble? Are you allowing for leverage, options trading, or short selling? If not, why not? What about multiple trades? Many bubbles get "frothy" before they burst, where an omniscient trader could make more through selling and buying back than just selling once at the peak.

If you're trying to work out how to maximize your return on $100 when you fire up your time machine, be careful. You may be better off making a bunch of high-risk transactions where most of them lose but enough win big to make you however much you need to buy the supplies you need to get home. Otherwise, the SEC's TTDU (time traveler detection unit) will probably catch you. :wink:
Haha, I love your use of TTDU, very cool :p

To answer your questions:
For this thread, I define "the beginning" as the lowest price to get in. I assumed this to be at the beginning, but you are free to pick any time.
I didn't mention leverage, options trading, etc, because I wanted to keep it simple:
you have $100 and can get in at any time, but only once, into any of the bubbles (any stock, gold, tulips, whatever), how much money can you come away with?

kayanco
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Re: Question on bubbles, stocks, etc.

Post by kayanco » Sun Sep 10, 2017 1:58 pm

Valuethinker wrote:
Sun Sep 10, 2017 8:06 am
..
If you adjusted for inflation, I don't think Florida land prices have done that well. And of course you had to pay property taxes on that land, plus capital gains taxes when you realized. Shiller's data shows what a disappointing investment residential housing has been in the last 150 years (Neil Monnery shows you data back 8 centuries, where we have it). I doubt commercial RE has been that much better-- few commercial RE structures survive 50 years, look at all those empty shopping malls in America, and central city land values have actually lagged, a product of changing technology and relocation of stores and offices to the edges of cities rather than the centres.
..
This might be a side-conversation but:
This always surprises me. Land is a finite resource. People will always have need for land, whether to rent an apartment on, build a home, office, factory, farm ... so I get bewildered that owning a finite valuable resource can be a bad investment.
Rothschilds? ..
I lost you here, but I respect the historical knowledge you have at hand.
All of the get rich fast schemes aren't about getting rich, which is (in the grand scheme of things "relatively") easy to do if you are patient and willing to spend a few decades at it -- after all Buffet didn't become a billionaire until he was in his 50s; he started investing as a teenager and it still took him 4 decades. All those schemes focus on the "fast" part.
This I agree with. The power of compound interest takes a long time to work. This is also the source of any value investor's dictum about "don't lose money". Or in Boglheads terms, spend it.
Good reminders, invaluable to always remember.

mnaspbh
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Re: Question on bubbles, stocks, etc.

Post by mnaspbh » Sun Sep 10, 2017 3:24 pm

If you could buy pre-IPO shares during the dot-com bubble, 50x+ returns were theoretically possible (though of the several dozen people I know personally who got involved in those, only one sold before the crashes--the rest lost some to all of their investments, and the one who sold missed out on over 1000% further growth before the crash). If you bought QQQQ (formerly QQQ) at the right time (just before the bubble started to inflate) and sold at the peak, you could have made about 3x. Well-timed AMZN purchases/sales could have gained about 70x IIRC (but would be worth about 700x today if you'd held on through the depths of the crash).

By the time the dot-com bubble was starting to get hyped, 2x returns would have been really good, but significantly negative returns were much more common. But by then, everyone was expecting much more than 2x returns (because the big run-up had already happened) so they tended to pile into the "next big thing" which was unsustainable (pets.com is the classic example).

The US stock market run-up that ended in the Great Depression was only about 10x over the preceding few years, but large amounts of leverage were common.

Picking the perfect penny stock could return 50x-100x or more, without needing a bubble as such...but net-positive returns on penny stocks are exceptionally uncommon, let alone big returns. Recent examples of gains are usually tiny or failing biotech companies that luck into a blockbuster drug and get acquired. Or gains from flat-out fraudulent manipulation (pump and dump schemes).

Historically-recent gold bubbles have been on the order of 2x-5x from lowest to highest. Real estate prices probably rose by around the same amount during 2000's, but high local variability and use of leverage makes it harder to make an apples-to-apples comparison.

These multiples are all estimates from memory and looking at a couple of historical charts, not crunching the raw data.

From my direct experience in multiple bubbles, there are a few typical patterns:
(1) Super-early adopters buy in very low, see a big run up, hold, and lose most/all.
(2) Super-early adopters buy in very low, see a big run up, cash out early, see it keep inflating, buy back in at a much higher price, and then lose most/all during the pop.
(3) Late adopters see a big run up, buy in near the peak, and lose most/all during the pop.

I've seen this repeated with currency trading, dot-com stocks, financial stocks, real estate, collectibles, and gold over the last few decades.

The most "successful" investor in a bubble that I know still kicks himself over selling "too soon". People who learn about his situation think he must be super-rich, but he's just moderately well off, and that's also caused him problems with relatives who assume he's lying to them about his lack of a vast fortune.

MotoTrojan
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Re: Question on bubbles, stocks, etc.

Post by MotoTrojan » Sun Sep 10, 2017 3:39 pm

$100 at the low of Bitcoin (2010 timeframe I believe) was over $72M as of a few months ago. Now you are probably closer to $150M...

Makes you wonder :).

alex_686
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Re: Question on bubbles, stocks, etc.

Post by alex_686 » Sun Sep 10, 2017 3:42 pm

2 more thoughts on this.Most of the historical data is pretty shoddy. There is much hindsight recollection by participants in these early bubbles. Don't trust anything before 1930. Second, most of the early and forable pricing is given to insiders and influential people. So it is very hard to get into something on the ground level. By the time something has gotten hot one is a fair way into the bubble.

Valuethinker
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Re: Question on bubbles, stocks, etc.

Post by Valuethinker » Sun Sep 10, 2017 3:54 pm

kayanco wrote:
Sun Sep 10, 2017 1:58 pm
Valuethinker wrote:
Sun Sep 10, 2017 8:06 am
..
If you adjusted for inflation, I don't think Florida land prices have done that well. And of course you had to pay property taxes on that land, plus capital gains taxes when you realized. Shiller's data shows what a disappointing investment residential housing has been in the last 150 years (Neil Monnery shows you data back 8 centuries, where we have it). I doubt commercial RE has been that much better-- few commercial RE structures survive 50 years, look at all those empty shopping malls in America, and central city land values have actually lagged, a product of changing technology and relocation of stores and offices to the edges of cities rather than the centres.
..
This might be a side-conversation but:
This always surprises me. Land is a finite resource. People will always have need for land, whether to rent an apartment on, build a home, office, factory, farm ... so I get bewildered that owning a finite valuable resource can be a bad investment.
Land in The Arctic tundra is still fairly valueless.

In other words location matters a lot. And then technology change. There are 100 storey residential towers being built where once there we're townhouses in Manhattan Toronto Hong Kong etc.

Telecommunications and highways have caused further decentralization.

Structures matter a lot. In the USA a 3000 square foot home costs at least 300k to build. Only in very expensive cities does the land cost more than that. Structures depreciate by 1 to 2 per cent pa. Then there are utilities and land taxes.

In an economic sense because land provides an occupancy service, someone can live there, whereas equities do not it should earn lower returns.

1 per cent real is not a bad bet.
Rothschilds? ..
I lost you here, but I respect the historical knowledge you have at hand.
The Rothschilds are singletons billionaires at best. Not on the scale of Buffett or Bloomberg or Gates.
All of the get rich fast schemes aren't about getting rich, which is (in the grand scheme of things "relatively") easy to do if you are patient and willing to spend a few decades at it -- after all Buffet didn't become a billionaire until he was in his 50s; he started investing as a teenager and it still took him 4 decades. All those schemes focus on the "fast" part.
This I agree with. The power of compound interest takes a long time to work. This is also the source of any value investor's dictum about "don't lose money". Or in Boglheads terms, spend it.
Good reminders, invaluable to always remember.
[/quote]

Valuethinker
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Re: Question on bubbles, stocks, etc.

Post by Valuethinker » Sun Sep 10, 2017 3:56 pm

alex_686 wrote:
Sun Sep 10, 2017 3:42 pm
2 more thoughts on this.Most of the historical data is pretty shoddy. There is much hindsight recollection by participants in these early bubbles. Don't trust anything before 1930. Second, most of the early and forable pricing is given to insiders and influential people. So it is very hard to get into something on the ground level. By the time something has gotten hot one is a fair way into the bubble.
I think we Do know what tulips cost. Or Dutch houses on The Herengracht canal. Or railway shares in London. Or south sea land company shares.

alex_686
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Re: Question on bubbles, stocks, etc.

Post by alex_686 » Sun Sep 10, 2017 6:53 pm

Valuethinker wrote:
Sun Sep 10, 2017 3:56 pm
alex_686 wrote:
Sun Sep 10, 2017 3:42 pm
2 more thoughts on this.Most of the historical data is pretty shoddy. There is much hindsight recollection by participants in these early bubbles. Don't trust anything before 1930. Second, most of the early and forable pricing is given to insiders and influential people. So it is very hard to get into something on the ground level. By the time something has gotten hot one is a fair way into the bubble.
I think we Do know what tulips cost. Or Dutch houses on The Herengracht canal. Or railway shares in London. Or south sea land company shares.
Peak at the data and you might be surprised by how much we don't know. Most trading took place off the exchange. Most of the data is exaggerated. For example we might know the high and low price for a month but not the average price. Often the trades had side deals which basically converted them to modern day futures or options. We know that some the market data was manipulated. At that is just for the items in your post. It is like an iceberg, a little historical information is visible but much lays beneath.

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Uncle Pennybags
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Re: Question on bubbles, stocks, etc.

Post by Uncle Pennybags » Tue Sep 12, 2017 11:31 am

It must be the tulip bubble. It is still referred to almost 400 years later.
Image

kayanco
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Re: Question on bubbles, stocks, etc.

Post by kayanco » Tue Sep 12, 2017 2:37 pm

MotoTrojan wrote:
Sun Sep 10, 2017 3:39 pm
$100 at the low of Bitcoin (2010 timeframe I believe) was over $72M as of a few months ago. Now you are probably closer to $150M...

Makes you wonder :).
This sounds unbelievable. I looked into this a little, and $100 in Bitcoin around 2010 could be worth over 1 million !!

I even see some calculations, as in the quoted post of 72 million.

So this is pretty incredible. If this is a bubble, what kind of an amazing bubble is this. I don't think we can dismiss it as: oh, this is nothing special, we see this kind of a return in bubbles all the time.

alex_686
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Re: Question on bubbles, stocks, etc.

Post by alex_686 » Tue Sep 12, 2017 3:11 pm

kayanco wrote:
Tue Sep 12, 2017 2:37 pm
So this is pretty incredible. If this is a bubble, what kind of an amazing bubble is this. I don't think we can dismiss it as: oh, this is nothing special, we see this kind of a return in bubbles all the time.
This actually is a classic sign of a bubble.

The rate of return is not that high. From $100 to $100,000,000 only requires a 300% gain a year. Which is high but in line for a bubble.

We are seeing exponential increases in prices, another classic sign.

What is the intrinsic economic value of Bitcoin? Zero. Like gold or Bennie Babies it is only worth what the next person is willing to pay for it. Is demand driven by solid fundamentals? Or is it a "Keynesian Beauty Contest", where people are buying it because they suspect others will buy it at a higher price, because they expect others to buy it at a higher price? These systems tend to be unstable. We don't even have to go to gold or tulips, the Dot Com Bust had real companies with real positive earnings loosing 90% of their value.

Lastly, how deep is the market? How much Bitcoin trades? I suspect it is a very thin slice. Thin markets tend to be volatile. If the market was mature I would think we would see options and futures, like we see for gold and currency.

I am not trying to totally dump cold water on Bitcoin. But it is very had to accurately price things which are experiencing exponential growth.

AlohaJoe
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Re: Question on bubbles, stocks, etc.

Post by AlohaJoe » Tue Sep 12, 2017 3:20 pm

alex_686 wrote:
Tue Sep 12, 2017 3:11 pm
Lastly, how deep is the market? How much Bitcoin trades? I suspect it is a very thin slice.
Bitcoin's market cap is $68 billion and $1.8 billion trades a day. As a point of reference, GE's market cap is $207 billion and $800 million trades a day.

alex_686
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Re: Question on bubbles, stocks, etc.

Post by alex_686 » Tue Sep 12, 2017 3:32 pm

AlohaJoe wrote:
Tue Sep 12, 2017 3:20 pm
alex_686 wrote:
Tue Sep 12, 2017 3:11 pm
Lastly, how deep is the market? How much Bitcoin trades? I suspect it is a very thin slice.
Bitcoin's market cap is $68 billion and $1.8 billion trades a day. As a point of reference, GE's market cap is $207 billion and $800 million trades a day.
Let me be a bit more precise. How much trading is there between BitCoin and real currencies for long term investments and holding? I am going to guess most of the BitCoin transactions are transnational. i.e., a transaction needs to take place. Both buyer and seller agree to the price in Bitcoin, swap local currency for Bitcoin, they do the transaction, and then they swap Bitcoin back to local currency. No to low currency risk because on the short turn around time. As such Bitcoin is acting more like a token then a currency. While not doomed to failure this type of currency has a rich history of bubbles.

And now a joke.

A husband comes home and proudly presents a new dog to his family. He claims it must be a excellent dog because it cost $10,000. The wife comments that it looks like a raggie mutt and how could it possible be worth $10,000? "Simply" said the husband. "I traded our two $5,000 cats for him".

kayanco
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Re: Question on bubbles, stocks, etc.

Post by kayanco » Tue Sep 12, 2017 4:59 pm

alex_686 wrote:
Tue Sep 12, 2017 3:11 pm
..
This actually is a classic sign of a bubble.
The rate of return is not that high. From $100 to $100,000,000 only requires a 300% gain a year. Which is high but in line for a bubble.
..
Hi Alex,

Can you please refer me to another bubble (or any other investment) with a similar return? (i.e. $100 -> $1million). I made this thread to get an idea of the highest return ever possible. Earlier in the thread AlohaJoe stated "During things like the South Seas bubble and Tulip mania, prices went up 10-30x. So $100 would have turned into $1,000 to $3,000."

Thanks.

kayanco
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Re: Question on bubbles, stocks, etc.

Post by kayanco » Tue Sep 12, 2017 5:01 pm

alex_686 wrote:
Tue Sep 12, 2017 3:32 pm
..

And now a joke.

A husband comes home and proudly presents a new dog to his family. He claims it must be a excellent dog because it cost $10,000. The wife comments that it looks like a raggie mutt and how could it possible be worth $10,000? "Simply" said the husband. "I traded our two $5,000 cats for him".
LOL. I like it :)

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randomizer
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Re: Question on bubbles, stocks, etc.

Post by randomizer » Tue Sep 12, 2017 5:20 pm

Bitcoin. Not that long ago you could get it for a buck or two.

alex_686
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Re: Question on bubbles, stocks, etc.

Post by alex_686 » Wed Sep 13, 2017 9:50 am

kayanco wrote:
Tue Sep 12, 2017 4:59 pm
Can you please refer me to another bubble (or any other investment) with a similar return? (i.e. $100 -> $1million). I made this thread to get an idea of the highest return ever possible. Earlier in the thread AlohaJoe stated "During things like the South Seas bubble and Tulip mania, prices went up 10-30x. So $100 would have turned into $1,000 to $3,000."
Action Comics #1. $.10 => $3,000,000.00

I kid somewhat but it is to illustrate a point. We can cherry pick time frames and ignore risk but if we do so we loose much information. I can find many assets that have appreciated more than a 1,000% a year. It seems odd to me that we pick a period of 16 years for Bitcoin. That is one nice thing about the Sharpe Ratio - it factors in both time and risk.

As I have mentioned before in this thread historical information is a bit dicey. While we have prices for the South Sea Bubble that does not actually mean you have traded into those positions. As a counterpoint we have good price data for some Dot Com companies before they went public. These would have offered similar returns to Bitcoin. This does mean you could have invested in those companies.

You have mentioned Maddoff before. While the rise was less than Bitcoin it went on for longer and was far less volatile, which makes it more impressive than Bitcoin IMHO. Of course that was built on fraud. For a compression look up Ivar Kreuger (The Match King by Frank Partnoy).

If you want something legitimate one could have gone long CDOs in 2008. The Big Short by Michael Lewis or The Greatest Trade Ever by Gregory Zuckerman.

It you want something that was legitimate and long term there was Long-Term Capital Management, which had high and stead returns. When Genius Failed by Roger Lowenstein has a good narrative. Inventing Money by Nicholas Dunbar has better math.

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